The development of bond market in India has amazed a lot of people. The corporate debt market in India has seen growth of asset backed securities which were found to be quite innovative in the recent past. The inception of corporate bond has witnessed greater innovations. Instruments such as floating rate instruments, convertible bonds, step redemption bonds, zero coupon bonds gained greater recognition.
In 1998, ICICI Bank issued step bonds which paid higher rates of interest with the approach of maturity clearly showing the benefits of bond issuance in India. In the same year IDBI Bank issued the deep discount bonds which had two put and call options before maturity. Step bonds issued by IDBI had a feature to pay out the redemption amount in installments after an initial holding period. These ground-breaking issues provided a range of securities which helped in maintaining a sought-after risk return balance. Due to these corporate issuers, preference has changed from public issues to private placements.
If we compare equity market with the bond market during the past decade, the equity market saw a drop from 42 percent of GDP in 1993-94 to 28.6 percent in 2000-01. This was not the case with the Government of India (GOI) bond market as it saw the increase in market size due to large scale fiscal deficits, from 28 percent of GDP to 36.7 percent in the same period. This resulted in a reduction in liquidity in the equity market and a substantial improvement in liquidity in the Indian bond market.
But there were some drawbacks of the GOI bond market as it did not use trading as an exchange and featured a bilateral negotiation between dealers. Thus, the market lacked price time priority and the bilateral negotiation imposed credit risk on participants which narrowed the market with a homogenous credit risk.
In 1998, ICICI Bank issued step bonds which paid higher rates of interest with the approach of maturity clearly showing the benefits of bond issuance in India. In the same year IDBI Bank issued the deep discount bonds which had two put and call options before maturity. Step bonds issued by IDBI had a feature to pay out the redemption amount in installments after an initial holding period. These ground-breaking issues provided a range of securities which helped in maintaining a sought-after risk return balance. Due to these corporate issuers, preference has changed from public issues to private placements.
If we compare equity market with the bond market during the past decade, the equity market saw a drop from 42 percent of GDP in 1993-94 to 28.6 percent in 2000-01. This was not the case with the Government of India (GOI) bond market as it saw the increase in market size due to large scale fiscal deficits, from 28 percent of GDP to 36.7 percent in the same period. This resulted in a reduction in liquidity in the equity market and a substantial improvement in liquidity in the Indian bond market.
But there were some drawbacks of the GOI bond market as it did not use trading as an exchange and featured a bilateral negotiation between dealers. Thus, the market lacked price time priority and the bilateral negotiation imposed credit risk on participants which narrowed the market with a homogenous credit risk.
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