The year 2022 has been nothing but eventful for bond markets. The year was marked by the rise in inflation followed by an increase in repo rate by the Reserve Bank of India (RBI) to tame inflation. The direct result of the rise in key rates was a fall in bond prices and an increase in bond yield. Accordingly, the yield on a 10-year-government bond rose by 13 per cent up to 7.61 per cent in 2022.
But now with inflation coming under control and interest rates assumed to be near their peak, how is the bond market expected to perform in 2023?
“Going forward it seems that the last RBI meeting the focus is slowly again coming back to growth instead of inflation thanks to the lowering of inflation due to the efforts of the central bank. And, if things move in the expected direction, then I believe the year of 2023 will be the opposite of 2022 because the rate hikes will subside, growth instead of inflation will be in focus and there will be a definite scope of yields coming down giving bonds investors returns with valuation gains. We might see a good year for debt funds return too. So yes, this is the right opportunity to enter the bonds market. If you are a trader you might land up making valuation gains in your portfolio and if you are a long-term investor then you have an opportunity to lock in your money at a higher rate which might not be sustainable in the coming periods,” says Ankit Gupta, Founder, BondsIndia.com
The year 2022 has been marked as the year of taming inflation at the cost of growth of the economy. Regulators worldwide have been increasing interest rates in order to capture the rising inflation. “In the Indian scenario we know that the repo rate which stood at 4 per cent in the April 2022 meeting now stands at 6.25 percent, an increase of 225 basis points the effect of which can be seen in 10-year benchmark Gsec bonds too. The 10-year benchmark was hovering around 6.65 percent in January 2022 and now in December is hovering around 7.30 percent meaning a price decline of around 4 percent. This is the year wherein the Debt mutual funds have given muted to negligible returns because of obvious reasons,” adds Gupta.
The bond market size in India currently stands at around $1.8 trillion, which can be split into $1.2 trillion for government securities and $0.6 trillion for corporate bonds. With the government looking to further develop the country’s infrastructure, a larger impetus will be on raising this capital from retail investments.
“In the coming year, we will see more corporates participating in the bond market (contributing to market growth), as a result increasing participation of various other segments of institutions. One such category, which is expected to progressively take up the lion’s share of the bond market is that of municipalities, through Muni bonds or Municipal bonds. In the coming year, we can definitely expect the size of the bond market to increase by at least one and a half times from its current size,” says Abhijit Roy, CEO, GoldenPi.
“In the current year, we see that the government securities yield closed at 7.3 per cent. The yields from corporate bonds varies based on the credit ratings of the bonds. To deep dive a little further, A rated corporate bond investments gain a 10 per cent and above yield, AA rated gain 9 per cent and above and AAA rated corporate bonds yield of 8 per cent and above. The rates for the coming year will vary based on the future RBI’s REPO rate announcements that will be announced in the next couple of months,” adds Roy.
Also read: Sovereign Gold Bond Scheme 2022: Govt launches next tranche, subscription open till Dec 23
Also read: Sovereign Gold Bonds: How to buy and avail discount?