Fixed income securities deliver scheduled cash flows via interest and principal, with India’s debt markets operating under RBI (sovereign, money markets) and SEBI (corporate bonds) oversight.
What is a bond?
A bond is a debt contract where an issuer raises funds and commits to periodic coupons and principal redemption at maturity, first sold in primary auctions and then traded in secondary markets on RBI/OTC platforms or exchanges as eligible. Indian bonds span central government G‑Secs, Treasury Bills, State Development Loans (SDLs), and corporate bonds, with secondary prices moving inversely to yields and reflecting credit/liquidity spreads.
Government of India’s role
The Government of India is the largest domestic issuer via T‑Bills for short-term cash management and dated G‑Secs for medium–long-term financing, with RBI conducting auctions and managing issuance mechanics. T‑Bills are zero-coupon discount securities (91/182/364 days), while dated G‑Secs typically carry semiannual coupons across 5–40 year maturities; SDLs are state issuances conducted via RBI auctions. RBI supports market functioning with primary dealers, NDS‑OM access, and CCIL settlement, anchoring the sovereign yield curve that benchmarks loans and corporate bond pricing.
India’s bond market structure
The market comprises sovereign (G‑Secs, T‑Bills, SDLs) and non-sovereign (PSU/financial/corporate) segments, with government securities trading primarily on NDS‑OM and OTC, and corporate bonds under SEBI’s RFQ/exchange and disclosure regime. Access has broadened through non-competitive bidding and NDS‑OM Web/broker connectivity for gilt account holders and eligible participants to improve liquidity and transparency. Recent regulatory focus includes standardised corporate bond cash-flow disclosures and trading conventions, alongside broader market development like corporate bond index derivatives exploration to deepen liquidity.
Valuation basics
A bond’s clean price equals the present value of all remaining coupons and principal discounted at the required yield; adding accrued interest gives the dirty price used for settlement. Price and yield move inversely, with duration and convexity capturing first- and second‑order rate sensitivity, and longer maturities/lower coupons implying higher rate risk ceteris paribus. Yield measures include current yield, yield to maturity, and yield to call/put for optioned bonds; in India, discount rates commonly reference the G‑Sec curve plus credit/liquidity spreads for corporates.
Worked example: recent 10Y G‑Sec line (clean/dirty price, accrued, duration, convexity)
Illustration uses the actively referenced 10‑year benchmark reissued line 6.33% GS 2035 discussed in contemporary market trackers; yields around mid‑2025 were quoted near 6.33–6.35% per public fixed‑income notes, which is consistent with a par‑ish trading level for a 6.33% coupon benchmark security.
Assumptions for illustration:
- Security: “6.33% GS 2035” (semiannual coupon, face value ₹100).
- Settlement date: a typical coupon accrual mid‑cycle date in July 2025 for illustration; actual coupon dates per ISIN documentation are semiannual (convention: ACT/ACT).
- Street yield input: YTM 6.35% annual (semiannual compounding, y/2 = 3.175%) based on publicly reported levels near 6.33–6.35% in late July 2025 trackers.
- Next coupon: assume semiannual schedule; day-count ACT/ACT; accrued days fraction example for method only (actual day counts to be taken from RBI/FBIL term sheets).
- Accrued interest method (semiannual):
- Semiannual coupon = 6.33% × ₹100 / 2 = ₹3.165 per period.
- Accrued interest = coupon × fraction of period elapsed; e.g., if 60% of the coupon period has elapsed, accrued ≈ 3.165 × 0.60 = ₹1.899 (illustrative; use actual day counts on trade date).
- Clean price via PV at YTM:
- Discount rate per half-year r = 6.35% / 2 = 3.175%.
- Clean price = PV(coupon annuity) + PV(face) = 3.165 × a‑immediate( r, n ) + 100 × (1 + r)^(-n), where n is remaining coupon count to 2035.
- For a benchmark near par (coupon 6.33% vs YTM 6.35%), the clean price would be very close to ₹100, slightly below owing to YTM > coupon (e.g., ~₹99.90–₹99.95 on inputs shown; exact value depends on precise dates and n).
- Dirty price:
- Dirty price = Clean price + Accrued interest; using the illustration above, if clean ≈ ₹99.93 and accrued ≈ ₹1.899, dirty ≈ ₹101.83 (illustrative; settlement adds accrued even if price near par).
- Modified duration and convexity (semiannual):
- Macaulay duration DDD is the PV-weighted average time to cash flows; modified duration Dmod=D/(1+y/m)D_{mod} = D / (1 + y/m)Dmod=D/(1+y/m) with m = 2 for semiannual.
- For a 10‑year, near‑par coupon G‑Sec around 6.3–6.4%, Macaulay duration is typically near 7.5–8.0 years; modified duration around 7.3–7.7, depending on exact remaining term and coupon dates (illustrative for the line).
- Convexity adds the curvature adjustment; for a standard 10‑year sovereign with semiannual coupons near these yields, convexity commonly falls in the low‑to‑mid double digits per ₹100 (e.g., 70–90 “per 100” scale, depending on exact dates), improving price estimates for larger yield shifts.
How to compute precisely on a trade date:
- Pull the exact coupon schedule and day count from the RBI auction/ISIN term sheet; compute exact accrued using ACT/ACT.
- Discount each cash flow at the street YTM split into semiannual rate; sum PVs for clean, add accrued for dirty.
- Compute Macaulay duration as D=∑t×PV(CFt)PriceD = \sum t \times \frac{PV(CF_t)}{Price}D=∑t×PricePV(CFt); modified duration as Dmod=D1+y/2D_{mod} = \frac{D}{1 + y/2}Dmod=1+y/2D; convexity using the standard second‑derivative cash flow summation for semiannual bonds.
Note on using an auction line:
- Example primary calendar: the Government announced new and re‑issue auctions such as “New GS 2040” and “6.90% GS 2065” in July 2025, typical of ongoing supply; the 10‑year benchmark is maintained via periodic re‑issues that keep liquidity high for pricing and risk metrics.
- Market color from late July 2025 indicated the 10‑year benchmark “6.33% GS 2035” yielding around 6.33–6.35% in trackers, supporting the par‑ish pricing assumption used for duration/convexity intuition above; for exact analytics use the day’s closing YTM and coupon clock.
Market access and compliance tips
- Execution: Participate via RBI auctions, non‑competitive bids, and NDS‑OM pathways; verify eligibility under RBI’s Access Criteria for NDS‑OM Directions 2025 before seeking direct access.
- Governance: Follow RBI’s government securities framework and SEBI circulars on corporate bond disclosures/trading standards for robust documentation and audit trails in fixed‑income operations.
- Analytics hygiene: Source benchmark yields and clean/dirty conventions from RBI/FBIL and platform term sheets to ensure accurate pricing, accrued interest, and risk metrics on reporting dates.
Risk Management Articles related to Model ‘C’ of CAIIB –Elective paper:
