Fixed income segment now needs reforms on the distribution side

If one word could summarise the fixed-income market in 2024, it would be “stability”

As we wrap up 2024, the fixed-income landscape has stood out as a beacon of stability amidst global financial turbulence and geopolitical instability. While markets worldwide grappled with volatility and uncertainty, the Indian debt market offered investors a much-needed sense of calm and stability of returns. As of end September-2024, the Indian bond market stood at $2.69 trillion.

2024: The Year Fixed Income Redefined Stability
If one word could summarise the fixed-income market in 2024, it would be “stability”. For investors, the motto "boring is beautiful" couldn’t be more relevant whilst the equity market struggled to keep volatility in check. Following rate hikes in prior years, the Reserve Bank of India (RBI) maintained a steady rate policy in 2024, creating a calm interest rate environment. Investors earned steady returns plus capital appreciation this year. The 10-year Government Security (G-Sec) yield reflected this stability, starting the year at 7.18 percent and currently at around 6.75 percent.

Democratising Debt Market Access via Progressive Regulatory Reforms

SEBI’s landmark decision to lower the face value of bonds from Rs 10 lakh to Rs 10,000 was a game-changer in 2024. This move broke down barriers, making bond investments accessible to retail investors. With just Rs 10,000, individuals could now diversify their portfolios and enjoy the benefits of stable income streams—an opportunity once accessible only to institutions.

Revolutionising Investments with Online Bond Platform Providers

With SEBI-registered OBPPs simplifying the investment process, retail investors could now buy bonds in minutes. These platforms provided the tools and transparency needed to make informed decisions, significantly driving retail participation. Bonds went from being seen as complex to becoming a straightforward and essential investment instrument in a retail portfolio.

Global Validation of Indian Bonds

India's inclusion in the JPMorgan Global Bond Index (GBI-EM) and Bloomberg's index in 2024 marked a significant milestone, propelling the country into the global investment spotlight. The subsequent inclusion in the FTSE Russell index, scheduled for September 2025, is poised to further solidify India's position as an attractive destination for foreign portfolio investment. This global recognition has not only underscored the maturity of India's bond market but also boosted domestic confidence.

The Rise of Infrastructure Bonds

Infrastructure bonds emerged as a focal point in 2024, supporting India’s ambitious growth agenda. With banks facing slower deposit growth, these bonds became a critical funding source, channelling resources into key development areas. For investors, infrastructure bonds offered not only predictable returns, typically in the range of 7.25–8.25 percent for tenures of 5–10 years, but also a unique opportunity to contribute to nation-building efforts. This alignment of public policy with investment opportunities underscores the vital role of infrastructure bonds in shaping India’s economic future.

2025: Navigating Global Uncertainty

Geopolitical tensions and inflationary pressures will likely continue influencing global markets. However, India’s stable interest rate environment offers a cushion against external shocks. The RBI is expected to take a measured approach to rate cuts, sustaining the attractiveness of fixed-income investments for risk-averse investors, with no more than 25-50bps cuts anticipated.

A Surge in Global Bond Flows

Starting January 2025, India will receive inflows from the Bloomberg Global Bond Index, followed by the FTSE Russell in September. These developments are poised to:

• #Add significant liquidity to the market.
• #Reinforce India’s position as a key player in the global debt market.
• #Enhance accessibility for foreign investors, boosting overall confidence in Indian bonds.

Non-Banking Financial Companies (NBFCs), facing tighter access to traditional credit, are increasingly exploring private credit channels. This segment will likely see significant activity in 2025, offering investors an alternative avenue for diversification. Also likely to see some stress in MFI sector lending due to supply-demand dynamics

The Push for Market Harmonisation

Distribution of Fixed Income remains unregulated unlike equities and mutual funds. This should likely be addressed for more transparency and investor protection. Fragmentation in fixed-income trading venues—spread across Request for Quote (RFQ) and Capital Markets on exchanges —remains a challenge, leading to inefficiencies in price discovery and liquidity. Further harmonization of trading platforms through interoperability, standardized reporting, and innovative settlement technologies can streamline operations and strengthen India’s bond market.

Retail Investors Lead the Way

Retail participation in bonds is poised for significant growth in 2025, fuelled by advancements in OBPPs and a stronger focus on investor education. With the wealth creation effect due to equity markets, the need for portfolio diversification and investing in low volatility assets will make fixed income stand out as obvious choice.

In a world of volatile equity markets and diminishing returns from traditional assets like real estate and gold, fixed-income investments stand out for their stability and predictability.

(Vishal Goenka is Co-Founder of IndiaBonds.com. Views are personal and do not represent the stand of this publication)