Asian Fixed Income: An Update on the Indian Bond Market

As of June 5, 2017, the yield of Indian sovereign bonds, as tracked by the S&P BSE India Sovereign Bond Index, stood at 7.03%—the second-highest sovereign bond yield among the Pan Asian countries, following that of Indonesia, at 7.09%. The yield of the S&P BSE India Sovereign Bond Index climbed 19 bps YTD as of the same date, though it was still at a seven-year low (see Exhibit 1).   RBI has cut rates six times since January 2015.

Indian sovereign bonds currently represent 70% of the overall Indian bond market. Their total market value expanded fivefold to INR 52.7 billion in the past 10-years, outpacing the growth of the corporate bond market, which doubled to INR 24.2 during the same period.  Among corporate bonds, the biggest sector was financials, which represented 9% of the S&P BSE India Bond Index, while other sectors like services, utilities, and industrials contributed around 1% to the overall market.

Although the S&P BSE India Bond Index jumped 13.22% in 2016, Indian bonds have been lagging other Pan Asia countries in 2017; the index advanced only 1.71% YTD as of June 5, 2017. Looking at the risk/return profile in Exhibit 2, all indices have consistently delivered solid returns, in the range of 8% to 10%.  It is interesting to note that the S&P BSE India Corporate Bond Index had lower risk than sovereign bonds during all periods studied; this could probably be explained by the Indian corporate bond characteristics, which are relatively fragmented and less liquid than the sovereign bonds.

Exhibit 1: Yield-to-Worst of the S&P BSE India Sovereign Bond Index

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