Why the government is trying hard to promote the bond markets in India.

The news

For quite some time, there has been a lot of effort to promote the bond market.

For instance, the SEBI reduced the minimum ticket size for bond investing from ₹10 lakh to ₹1 lakh in 2022. In 2024, it further reduced the same to ₹10,000 encouraging retail participation.

Now the SEBI has taken another step. It has allowed mutual funds to buy and sell Credit Default Swaps (CDS).

Before we explain why the government wants the Indian bond market to be as robust as equity markets, let’s quickly understand CDS.

Credit Default Swap

A Credit Default Swap (CDS) is like insurance for loans or bonds.

Imagine a company issuing bonds to borrow funds for business expansion. You buy its bond but are worried about not getting your money back. So you buy a CDS from a bank, which promises to pay you back if the company doesn’t. In exchange, you pay the bank a premium, just like you pay for insurance.

You see, because of the availability of CDS, more investors would invest in that company’s bond.

Now, mutual funds can buy & sell CDS. Hence, promoting higher investor participation in the bond market.

The Indian Bond Market

You see, the size of the global equity market is about $110 trillion and the bond market is even bigger, about $130 trillion.

Usually, we observe that a country’s bond market is bigger relative to its equity market. But with India, it’s the contrary.

India ranks fifth in terms of the world’s largest stock market, with a market value of all listed companies over $5 trillion. In terms of the biggest bond markets, we are not even in the top ten. The size of India’s bond market is about $2.6 trillion, half of our equity markets.

So the government wants higher investor participation in the bond market, making it as robust as domestic equity markets. Here’s why.

The importance of Bond market

1. Lowering Borrowing Costs for Companies:
A well-developed bond market means better access to cheaper credit. It reduces their cost of capital, making it easier for companies to invest in business expansion and innovation.

2. Strengthening Financial Stability:
The bond market helps distribute risk across a broad range of participants, reducing the dependency on the banking system. A diversified financial ecosystem ensures a more resilient economy during financial shocks.

3. Encouraging Foreign Investment:
A transparent and well-developed bond market attracts foreign investors looking for stable returns. This inflow of capital boosts a country’s reserves and strengthens currency.

To conclude

It’s the bond market that ensures a steady flow of capital that keeps the wheels of the economy turning, ultimately benefiting the businesses and equity owners.

So in a way, a robust bond market doesn’t just support the economy—it helps preserve your wealth.

The popular saying sums it up best: The debt market is the fountain of funds, while the equity market is the recipient of those funds.