How India’s bond market evolved over the last 10 budgets under Modi govt

In terms of absolute numbers, the total outstanding amount of corporate bonds galloped from Rs 16.49 lakh crore to Rs 44.16 lakh crore

Over the past decade, the Indian bond market witnessed a sharp growth in terms of market depth and the number of retail participants. According to the data compiled by Moneycontrol, the outstanding amount of government securities (G-Secs) and corporate bonds has seen a growth of over 165 percent in the last 10 years.

In terms of absolute numbers, the total outstanding amount of corporate bonds galloped from Rs 16.49 lakh crore to Rs 44.16 lakh crore. Similarly, government borrowings through G-Secs increased to Rs 15.43 lakh crore in FY24 from Rs 5.79 lakh crore in FY14.

Market experts attributed this change to various announcements made by the government during the Union Budgets, according to a Moneycontrol analysis.

Apart from the government announcements during the Union Budgets, regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) also announced various measures to increase retail participation in the bond market.

Budget announcements

These announcements include allowance of foreign investors to invest without limits in certain government securities announced in Budget 2020-21, urging regulators to move from ‘AA’ to ‘A’ rating for investment eligibility in Budget 2018-19, and tax-free infrastructure bonds for projects in roads, rail and irrigation projects in 2015-16.

Additionally, a decision to incentivise cities to improve their creditworthiness to issue municipal bonds was announced in 2023-24, while infrastructure and green bonds were introduced between 2021 and 2023. All these announcements helped to deepen the bond market and increase retail participation in the last 10 years.

Let us see which announcements impacted the bond market.

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Tax-free Infrastructure bonds

In the Union Budget 2015-16, the government announced tax-free infrastructure bonds for projects in roads, rail and irrigation.

Experts said that these bonds were secured, redeemable, non-convertible debentures issued by government entities to individuals and institutional investors to mobilise funds needed for projects in the infrastructure development sector.

“Government with a view to deepen the bond market and attract foreign monies might take steps to improve the ease of investing for foreign investors,” said Tirth Shah, Founder, Thefixedincome.com, a debt trading platform.

Adding to this, on the infrastructure bonds front, the Union Budget 2021-22 announced infrastructure debt funds eligible to raise funds by issuing tax-efficient zero coupon bonds.

While this move was aimed at attracting foreign investment into the infrastructure sector, the Budget also proposed to relax certain conditions related to the prohibition of private funding, restriction on commercial activities and direct investment in infrastructure.

Credit ratings movement

Budget 2018 was presented by the BJP-led NDA government before the 2019 Lok Sabha elections, in which the Finance Minister urged regulators to move from ‘AA’ to ‘A’ rating for investment eligibility.

This was just to encourage issuers to raise funds from the bond market.

During that Budget, the Finance Minister also said that the government would establish a unified authority for regulating all financial services in International Finance Service Centres (IFSCs) in India.

IFSC was aimed at bringing back financial services and transactions by Indian corporate entities in India, which were earlier carried out in offshore financial centres. This was also aimed to enable easier access to global financial markets for Indian corporates.

In November 2019, the government introduced a bill to set up a unified financial regulator in the IFSC. Later in 2020, it established the International Financial Services Centres Authority (IFSCA), headquartered in Gandhinagar, Gujarat.

Fully accessible route

Further, to deepen the bond market, the central government, in the Union Budget 2020-21, opened certain categories of government securities for non-resident investors for investment without any restrictions.

Post this, RBI introduced a separate channel, namely ‘Fully Accessible Route’ (FAR), to enable non-residents to invest in specified government bonds with effect from April 1, 2020.

Since then, foreign players have seen a rise in investments, which grew sharply after JP Morgan recently announced the inclusion of Indian bonds in the global bond index.

On December 22, Moneycontrol reported that investment by foreign portfolio investors (FPIs) in Indian government securities through the FAR rose 35 percent since JP Morgan announced that Indian bonds would be included in the JP Morgan Emerging Markets Bond Index, per data from the Clearing Corporation of India (CCI).

According to the data, as of December 20, FPI investment in FAR securities had risen 35 percent since September 22, and 65 percent since April 3.

In absolute terms, FAR holdings of FPIs stood at Rs 1.28 lakh crore on December 20, 2023, compared to Rs 94,709.302 crore on September 22, 2023, and Rs 77,441.358 crore on April 3, as per CCI data.

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Green bonds

In the Union Budget 2022-23, as a part of the overall market borrowings in 2022-23, the government announced sovereign green bonds (SGrB) for mobilising resources for green infrastructure.

“The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy,” the finance minister said.

On January 25, 2023, the centre raised Rs 8,000 crore through its maiden sovereign green bond issue. The bonds had a 10-year and 5-year maturity and set yields over six basis points (bps) below the current normal sovereign benchmark bonds.

The government set 7.29 percent as the cut-off yield on the maiden 10-year SGrB or NEW GOI SGrB 2033 and 7.10 percent as the cut-off yield on the NEW GOI SGrB 2028.

Going ahead, Shah from Thefixedincome.com said, “With the positive news of Indian sovereign’s inclusion in the bond inclusion. The government has included green bonds under FAR securities. We can see a healthy off-take of such securities from Global ESG funds.”

Municipal bonds

Presenting the Budget 2023-24, Finance Minister Nirmala Sitharaman on February 1, 2023, said that cities will be incentivised to improve their creditworthiness to issue municipal bonds.

“The government's decision to subsume all off-budgetary spending within the Budget is a positive step towards fiscal transparency. This will give investors and the public a more accurate picture of the country's true fiscal position,” Shantanu Godambe, VP- Investments, DSP Mutual Fund, said.

What experts say

Godambe said the government's efforts to reduce the cost of borrowing for environment-supporting sectors and the infrastructure sector and to diversify the sources of financing the deficits are commendable. These measures are crucial for promoting sustainable development and economic growth.

Murthy Nagarajan, Head-Fixed Income, Tata Asset Management, said these announcements were made to deepen the bond market and create interest in these instruments so that the government can borrow large amounts through these instruments if the need arises.

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What to expect in Budget 2024-25?

Money market experts said that they expect a few things such as tax benefits, a conducive environment for non-resident Indian and foreign investors, and achieving the fiscal deficit target.

Godambe said it is important for the government to adhere to the fiscal consolidation glide path and achieve the fiscal deficit target of 5.9 percent for FY24.

“This will help to ensure that the country's finances remain sustainable and that the government can manage its debt burden,” he added.

Further, Nagarajan of Tata Asset Management expects the government to give taxation benefits in the same way as for 5-year fixed deposits in banks, which is allowed for indexation.