As fixed deposit rates beginning to ease after the RBI’s rate cut cycle, investors are increasingly looking beyond traditional savings instruments in search of better risk-adjusted returns.
According to Nishchay Nath, founder and CEO of BondScanner, PSUs and corporate bonds are emerging as attractive alternatives, aided by improved retail access, regulatory reforms and greater transparency.
In this edition of ETMarkets Smart Talk, Nath discusses growth financialization of fixed income securities in India, the reasons why bonds are gradually becoming a dominant investment option and the key factors that investors should evaluate before seeking higher returns. Edited extracts –
Short positions in G-Secs on cards to improve liquidity
The Reserve Bank of India has unveiled draft rules allowing participants to take short positions in government securities, in a bid to boost market liquidity and price discovery. A detailed framework for trading “as-issued” securities, i.e. bonds that have not yet been officially released, is also introduced. These measures, with specific limits for banks, primary securities dealers and others, are open for public comment until July 17.
Q) As fixed deposit rates come down, many investors are turning to bonds and alternative fixed income products. How do you see the trend shaping up?
A) The change that is taking place is both real and progressive. After the RBI cut in December, the repo rate stabilized at 5.25%, and major banks followed suit, with most offering high retail FD rates.
Investors who have traditionally placed money in FDs are slowly discovering that an AAA-rated PSU or a highly-rated corporate bond can offer a significantly better return for a comparable risk profile, with the added benefit of locking in the current rate for a longer duration.
What has changed structurally is access, because a few years ago it was an institutional conversation, but today retail investors can compare yields, ratings and maturities and invest accordingly.
FD rate moderation is the trigger and the OBPP framework is what allows people to act on it.
Q) Industry data suggests that retail participation on online bond platforms has increased sharply in recent years. Please share the numbers. How has your platform developed?
A) According to NITI Aayog, India’s corporate bond market has the potential to exceed ₹100-120 trillion by 2030, driven by deeper structural reforms and institutional capacity building.
The regulatory groundwork has been deliberated, with SEBI reducing the minimum face value from ₹10 lakh to ₹1 lakh in 2022, then reducing the effective ticket size to ₹10,000 and formalizing the OBPP framework so that retail investors can transact through a regulated and exchange-settled channel.
At BondScanner, we have seen consistent growth, with investor participation and 80x.
Q) Do you think India is seeing a “financialization of fixed income” similar to what has happened for equities over the last decade?
A) Drawing this parallel would be accurate but we are still at the very beginning of the curve. The financialization of stocks over the last decade has had three major elements: low-friction digital access, a regulatory push and a behavioral shift where ordinary investors started treating market instruments as everyday savings tools, and SIPs did the same for mutual funds.
Fixed income currently has the first two: access is resolved by OBPPs, and SEBI has gradually lowered barriers and strengthened investor protection.
What is still maturing is investor behavior – the habit of systematically allocating to bonds in the same way that we still do to equity SIPs.
The next few years are going to be about transforming bonds from a product that people are learning about to one that they use as the default for the stable part of their portfolio.
Q) A common market observation is that the highest returns are often a sign of the highest risks. How should retail investors differentiate between attractive returns and red flags?
A) This is the most important thing a new bond investor must internalize: return is market pricing risk, not generosity. If a bond offers several points more than an FD of comparable duration, the right reaction is not enthusiasm, but the question of why.
Retail investors should be aware of four essential factors: First, the credit ratingand the rationale for the rating, because a downward trend tells investors more than the rating itself.
Second, whether the bond is secured or unsecured, secured bonds give investors a claim on the issuer’s assets in case something goes wrong.
Third, the issuer’s cash flow, where a healthy company can comfortably service the coupon, while a struggling company often borrows just to stay afloat.
Fourth, liquidity – so that investors have the option to exit before maturity if they need to. A red flag arises when an attractive yield collapses, once tested against the second check.
Our job as a platform is to surface rating, yield, maturity and liquidity – transparently, before investors buy, not after.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
