According to BondScanner Founder & CEO Nishchay Nath, high-rated PSU and corporate bonds are emerging as attractive alternatives, aided by improving retail access, regulatory reforms and greater transparency.
In this edition of ETMarkets Smart Talk, Nath discusses the growing financialization of fixed income in India, why bonds are gradually becoming a mainstream investment option, and the key factors investors should evaluate before chasing higher yields. Edited Excerpts –
The Reserve Bank of India has unveiled draft rules allowing participants to take short positions in government securities, aiming to boost market liquidity and price discovery. A detailed framework for trading “when-issued” securities, bonds yet to be officially released, is also introduced. These measures, with specific limits for banks, primary dealers, and others, are open for public feedback until July 17.
Q) As fixed deposit rates moderate, many investors are moving towards bonds and alternative fixed-income products. How do you see the trend taking shape?A) The shift which is taking place is both real and gradual. After the RBI’s December cut, the repo rate has settled at 5.25%, and the large banks have followed, with most offering high retail FD rates.
Investors who have traditionally parked money in FDs, are slowly discovering that an AAA-rated PSU or a well-rated corporate bond can offer a meaningfully better yield for a comparable risk profile, with the added benefit of locking in today’s rate for a longer tenure.What has changed structurally is access, as a few years ago this was an institutional conversation but today retail investors can compare yields, ratings and maturities and invest accordingly.The moderation in FD rates is the trigger and the OBPP framework is what enables people to act on it.Q) Industry data suggests retail participation on online bond platforms has grown sharply in recent years. Please share numbers. How has your platform grown?
A) According to NITI Aayog, India’s corporate bond market has the potential to exceed ₹ 100-120 trillion by 2030, through deeper structural reforms and institutional capacity building.
The regulatory groundwork has been deliberate, with SEBI cutting the minimum face value from ₹10 lakh to ₹1 lakh in 2022, then bringing down the effective ticket size down to ₹10,000, and formalizing the OBPP framework so retail investors can transact through a regulated, exchange-settled channel.
At BondScanner, we have seen consistent growth, with investor participation at 80x. Q) Do you believe India is witnessing the “financialization of fixed income” similar to what happened in equities over the past decade?
A) Drawing that parallel would be accurate but we are still at the very start of the curve. The equity financialization of the last decade has had three major elements: low-friction digital access, a regulatory push, and a behavioural shift where ordinary investors started treating market instruments as everyday savings tools, and SIPs did that for mutual funds.
Fixed income currently has the first two: access is being solved through OBPPs, and SEBI has been steadily lowering barriers and tightening investor protection.
What’s still maturing is investor behaviour – the habit of routinely allocating to bonds the way it is still done to equity SIPs.
The next few years are going to be about turning bonds from a product which people discover into one that they default to for the stable part of their portfolio.
Q) A common market observation is that the highest yields often signal the highest risks. How should retail investors differentiate between attractive yields and red flags?
A) This is the single most important thing a new bond investor needs to internalize: yield is the market pricing risk, not generosity. If a bond is offering several points more than a comparable-tenure FD, the right reaction isn’t excitement – it’s the question why.
Retail investors must be aware of four critical factors: First, the credit rating, and the rating rationale, as a downgrade trend tells investors more than the letter grade itself.
Second, whether the bond is secured or unsecured as secured bonds give investors a claim on the issuer’s assets if things go wrong.
Third, the issuer’s cash flows, where a healthy business can comfortably service the coupon, while a stretched one is often borrowing just to stay afloat.
Fourth, liquidity – so that investors have the option to exit before maturity if they need to. A red flag is when an attractive yield collapses, once tested against the second check.
Our job as a platform is to surface rating, yield, maturity, liquidity – transparently, before investors buy, not after.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
