This Paper has won Consolation Prize in the CoolAvenues' Paper-writing Competition - "In Search of Excellence" - for the Year 2005.

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Synopsis

A key litmus test for any country’s financial market stability and diversity is the depth of its bond market. This in turn is reflected by the diversity of bonds issued in the market.

Indian Debt Market is overwhelmingly dominated by government securities (about 80% of the total). Of the remaining, close to 80% again comprises privately placed debt of public financial institutions.
Indian corporate debt market is in its nascent phase owing to easy long-term cash credit availability from banks. In light of this background, introduction of junk bonds in Indian market assumes significance. With the economy booming, it is perfect time to introduce the junk bonds.

In this paper, we have shown the evolution of bond market in India, PEST analysis and the road ahead for Indian bond market .We have made an attempt to throw some light on the necessity, feasibility and benefits of having junk bond market in India with the aid of scenario planning considering the optimistic and realistic situations. We have taken into consideration the regulatory issues, the risk-return trade-offs and made some recommendations in the form of models in the end. One of them is the use of junk bonds to diversify portfolio in mutual funds and ensuring higher returns through better credit spreads. Another key observation being that for long-term investments in junk bonds, the benefits accrued outweigh the credit risk. This enables bearing of any credit risk arising out of using high yield junk bonds.

Introduction of junk bond market would also help the companies with lower credit ratings (especially the rising stars) to generate funds through these alternate investment vehicles. Moreover, for an economy doing well and attracting foreign investment like that of India, a bold step like introduction of bonds would reflect on the maturity of Indian financial markets and especially the bond market coming of age.

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* Contributed by -
Ankit Chetan & Sudhanshu Duggal,
National Institute of Industrial Engineering (NITIE),
Mumbai.