About Bonds and Inflation Impact
- A bond is a financial instrument that promises a fixed return (face value) at the end of a specific period, unlike equity, which has no fixed term or guaranteed returns.
- Bonds are generally safer investments used to hedge against risks or act as a store of value.
- Bond yields are inversely proportional to their market price: when prices fall, yields rise.
- Inflation erodes the real returns from bonds. If inflation exceeds bond yield, investors lose purchasing power.
- When inflation expectations rise, the Central Bank typically raises interest rates, causing bond prices to fall and yields to rise, impacting investment decisions across the economy.
- Currency depreciation also impacts foreign bondholders negatively, reducing their real returns when converting back to their home currency.
About the Indian Bond Market
- The Indian Bond Market is a vital segment of the financial system where government entities, corporations, and financial institutions raise funds by issuing bonds.
- Investors provide loans to the issuers and, in return, receive periodic interest payments and principal repayment upon maturity.
Structure of the Indian Bond Market
- Primary Bond Market: In the Primary Market, new bonds are issued by the government, corporations, or financial institutions to raise capital.
- Government Securities (G-Secs): Bonds issued by Central and State Governments, including Treasury Bills (short-term) and Government Bonds (long-term).
- Corporate Bonds: Bonds issued by private or public companies, credit-rated based on their creditworthiness.
- Municipal Bonds: Issued by local governing bodies for funding public infrastructure projects.
- Public Sector Undertaking (PSU) Bonds: Bonds issued by government-owned corporations.
- Green Bonds: Dedicated bonds for financing environmentally sustainable projects.
- Masala Bonds: Rupee-denominated bonds issued in foreign markets.
- Secondary Bond Market: In the Secondary Market, previously issued bonds are traded among investors.
- Examples include instruments like Treasury Bills (T-Bills), Commercial Papers (CPs), and Certificates of Deposit (CDs).
