Opportunities to get yield in Indian fixed income

It is challenging not only for Non-Resident Indians and Persons of Indian Origin (PIOs) but also for most resident individuals in India to find adequate information on the Indian fixed income securities/ bond market. 

Retail investors are too focussed on stocks or are always keen on putting their hard-earned money in either bank or corporate deposits. 

They are not even nudged to invest in the fixed income markets also because even wealth advisors and intermediaries themselves lack both interest and knowledge about the opportunities in the bonds market. 

Thus, the participation of retail investors in the Indian bond markets is negligible. And because their absence leads to negligible trading activity, or illiquidity, even the most informed high networth individuals invest in bonds not to trade but to hold their bond investments until they mature – which is not an efficient way of investing.

This is unfortunate because there is no dearth of investment opportunities in the Indian bond market, and the returns can be enticing – and to an extent much safer than buying shares.

Photo courtesy: SEBI Bulletin
Photo courtesy: SEBI Bulletin

NRIs or PIOs looking at Indian bonds should first consider testing the waters in the sovereign bonds market – which are guaranteed by the government and almost “risk-free”.

Presently, sovereign bonds (issued by the Government of India) of 2 and 10 year maturities pay investors an annual yield of around 6.70% and 6.85% respectively. US Treasuries of corresponding maturities are trading at around 1.86% and 2.07%. This means you get paid an extra yield of 2.35% and 4.78% for the respective maturities, if one considers “risk-free” investment in India.

The “risk free” here means no credit/repayment risk, though there is some market risk in terms of price movements influenced by interest rate movements. 

Further, Indian corporate bonds with the highest credit rating of “AAA” are trading at yields that are 1-1.5% points over what sovereign bonds pay. This kind of returns for NRIs is surely worth even after accounting for the value of the rupee against the dollar, if one is considering investing money from their Non-Resident External accounts (that are repatriable) or the Non-Resident Ordinary accounts (that are repatriable up to only a limit).

Photo courtesy: SEBI Bulletin
Photo courtesy: SEBI Bulletin

For NRIs presently invested in bank deposits (repatriable) like the Foreign Current Non-Resident (Banks) deposits which yield around 3-3.25%, there is a clear opportunity to earn annualised 7% in sovereign bonds and in excess of 8% in corporate bonds.

For conservative investors, there is a category of public sector bonds (PSU bonds) that are issued by government owned companies. These bonds have marginally higher perceived risk but one can invest, after carefully perusing prospectus, safely in bonds of good public sector companies to earn around 8% yield. 

The higher returns in corporate bonds is the price one gets for lack of liquidity, that is you get more than fair returns on your investment if you compromise on the trading opportunities and assume that it’s difficult to liquidate your investment at a profit during the holding period. 

Photo courtesy: Bloomberg
Photo courtesy: Bloomberg

Now, if you have surplus investible funds that you can invest without worrying about liquidity over the life of the bonds, this is the market to earn handsome and steady returns on your investments. 

Let me assure you that several corporate bonds are frequently traded and both HNI and retail investors have some interesting options in both primary and secondary markets. And then there is also the option of investing through debt mutual funds that make it easy to invest indirectly in the bonds market but without the complications of understanding the intricate market technicalities and operational issues. 

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Note: Connected to India articles on NRI personal finance are intended to help Non-Resident Indians (NRIs) understand the increasingly complex world of financial investments. It is not a solicitation, recommendation, endorsement, of any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.