Indian corporate bonds market –an analytical prospective
Bond markets in emerging markets are illiquid as investors and issuers grapple with major microstructure and legal issues. The importance of bond markets as a source of finance has increased during the economic slowdown as companies diversified away from reliance on banks for funding and many governments increased borrowing to fund the economic slowdown in their countries. Indian corporate bonds market is very illiquid vis-à-vis the Government securities market and heavily rely on AAA rated bonds for both issuance and trading. The data dissemination provided in public domain is inadequate to effectively price bonds taking all risks into account. Bank bonds demand hefty premia from investors and they are considered almost risk free with low credit spread. Investors use Credit rating information to price bonds in the market. Indian corporate sector is fast moving to international markets to raise funds through ECB / FCCB route though FCCB funding has dried up due to bad equity market conditions. Issuance market has remained concentrated with few issuers dominating the market. Financial companies like Non-Banking Finance companies dominate the market with issuances. The study did not find any significant relationship of coupon with optionality of the bond but it found that the Rating has significant relationship with coupon. Lower maturity bonds were having comparatively higher coupon than long maturity bonds. This may be possible as the year 2011-12 witnessed unprecedented liquidity scarcity in the Indian market and rolling over a debt was considered costly and investors demanded higher premia to fund short term bonds. While trading, investors demanded a higher premia for taking investment decision on bonds having floating rate. The relation between Rating class and yield was also found to be rational as higher yield were demanded on bonds with lower rating. The probability of default is higher at the shorter end and the same falls at the longer end. The reason may be the uncertainty existing in the short term with respect to liquidity and other macroeconomic factors might be warranting higher probability of default to be factored in yields. The study finds that the market used the past spreads to price the credit spread they would charge on corporate bonds while trading in the market.
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