With the Securities & Exchange Board of India having discussions with the Reserve Bank of India to launch derivative contracts in the bond market, experts believe that interest from retail investors in these instruments will only come if they are structured right and there is more education.
They said that this will help deepen the market, but initially it will only be an institutional play. Mrugank M Paranjape, the chairperson of the IMC Task Force on Capital Markets and Managing Partner MCQube said, more products is a much needed step to deepen the markets, all derivatives and exchange traded contracts need a gestation period of 5-10 years to garner traction.
Venkatakrishnan Srinivasan, Founder and Managing Partner at Rockfort Fincap LLP, believes that before introducing bond derivatives, both issuers and investors must first examine the necessity and purpose of such structures and assess how they can mutually benefit from them. “Corporate treasuries, in particular, need to be educated on the role and objective of undertaking derivative transactions,” he said.
He added that the upcoming discussion paper should clearly outline the purpose of bond derivatives, illustrate sample transaction structures, and explain how these instruments can support issuers and other market participants. “For derivatives to work effectively, both the issuer and investor must be comfortable with floating-rate bond structures — which remain quite rare in the Indian market. Only then can fixed-versus-floating derivative transactions be meaningfully explored,” Srinivasan explained.
He added that investor-friendly structures such as zero-coupon or deep-discount bonds from AAA-rated issuers, as well as regular monthly interest and principal payment options, can help build investor confidence and position bonds as a credible alternative to fixed deposits.
Currently, the regulatory framework, introduced in 2023, allows futures trading on corporate bond indices consisting of securities rated AA+ and above. The segment saw only a total value traded of Rs 118 crore in November so far.
In September, a Sebi official had said, “Corporate bond index derivatives trading is another frontier in this regard. Good discussions are ongoing between Sebi and RBI, and we are hopeful that we will see progress soon.” He added that aligning the bond market’s platforms and settlement process with equities could help bonds emerge as a stronger investment class.
Last week, Tuhin Kanta Pandey, Sebi chairman, highlighted the need for a market where bonds can be traded like equities where investors can chose not to hold till maturity. Commenting on the secondary market for bonds, he observed that the Indian bond market continues to face challenges of limited liquidity and market depth. “Unlike equities, every bond issue carries a distinct tenure, ISIN, and structure, which makes fungibility and trading difficult. To address this, SEBI has rightly encouraged issuers to reissue existing securities by limiting the number of ISINs,” he said.
