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Indian corporate bonds market –an analytical prospective


  • Nath, Golaka


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.

Suggested Citation

  • Nath, Golaka, 2012. "Indian corporate bonds market –an analytical prospective," MPRA Paper 38992, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:38992

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    References listed on IDEAS

    1. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    2. Balasubramanian, N. & Black, Bernard S. & Khanna, Vikramaditya, 2010. "The relation between firm-level corporate governance and market value: A case study of India," Emerging Markets Review, Elsevier, vol. 11(4), pages 319-340, December.
    3. Shah, Ajay & Thomas, Susan & Gorham, Michael, 2008. "Indian Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780123742513.
    4. Pipat Luengnaruemitchai & Li L Ong, 2005. "An Anatomy of Corporate Bond Markets; Growing Pains and Knowledge Gains," IMF Working Papers 05/152, International Monetary Fund.
    5. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
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    More about this item


    Indian Corporate bond market; corporate bond; emerging market; bond rating; probability of default; credit spread; spot yield curve; credit risk;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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