Page 43 - Banking Finance May 2025

ARTICLE

unexhausted, the bond market trades in such securities A favourable yield spread compared to other countries
actively. As the issuance reaches exhaustion limit, the attracts foreign capital. The 10-year G-sec benchmark paper
number of trades decline placing such securities in the is a cornerstone of India's financial markets, influencing
sparsely traded or untraded category. investment decisions, policymaking, and the broader
economic environment. Looking at the historical movement,
They are also removed from the margin eligibility category India has seen its 10-year benchmark rate falling from
by CCIL and RBI and replaced by actively traded security. 12.75% levels in 1998 to the 6.89% levels of 2025 marking
Hence, investors who plan to hold such securities till significant improvement in the economic condition of the
maturity may enjoy half yearly coupon payments, but traders country in the past two decades. There has been an influx
need to exit by booking profits or cutting losses if it remains of foreign funding which has created a demand for sovereign
in the trading parlance of the market. When a security is bonds which has also lowered the borrowing cost for the
traded rarely, it is not possible to find a desirable exit and government.
may lead to distressed selling or locking funds in holdings till
maturity. The government comes with conversion or switch Global Integration and Future Opportu-
auctions at times to ease the pressure of redemption and
may provide investors with an exit option, but the nities
possibilities are not coincident with one's holdings. The recent addition of India's sovereign bonds in the JP
Morgan and Bloomberg's Global Bond Index has added
another feather in the cap for
India. The influx of close to $21
billion has eased the yields from
above 7.00% levels to 6.80%
levels. Further, issuance of
sovereign green bonds is
changing the landscape of
government bonds.

We may see a steady transition of
all government bonds turning
green. However, India's
vulnerability in climate risk index
is making this transitionary path
The most traded security is the 10-year
benchmark paper. The yield of the 10-year
G-sec reflects market sentiment regarding
economic conditions, inflation expectations,
and monetary policy. A rising yield often
signals expectations of higher inflation or
tighter monetary policy, while a falling yield
suggests the opposite. It is widely used by
institutional investors, such as banks, mutual
funds, and insurance companies, as a
benchmark for portfolio allocation and
performance. The 10-year G-sec yield is also
used to price long-term bonds and loans. It
is a critical determinant for foreign portfolio
investors (FPIs) when deciding on
investments in Indian debt markets.

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