Bond Market Ecosystem

The Indian bond market is a network that connects borrowers (issuers) with lenders (investors) through a series of regulated platforms. It is split into a primary market, where new bonds are created, and a secondary market, where existing bonds are bought and sold.

SEBI (Securities and Exchange Board of India) oversees the market, while the RBI (Reserve Bank of India) influences liquidity and interest‑rate policy. Bonds can be listed on recognised stock exchanges such as NSE and BSE, and settlement is handled by depositories (NSDL/CDSL) under the T+2 framework.

For the NISM exam, candidates must know the flow of a bond from issuance to trading, the participants involved at each stage, and the regulatory checkpoints that ensure market integrity.

• Primary market – creation of new securities
• Secondary market – liquidity and price discovery

Issuers include the Government of India, state governments, public sector undertakings, and corporates. They decide the bond size, coupon, tenure and rating before approaching the market.

Investors range from banks, mutual funds, insurance companies, pension funds to retail investors. Their risk appetite and asset‑liability matching drive demand for different bond types.

Intermediaries such as merchant bankers, brokers, and depositories facilitate issuance, underwriting, trading and settlement. Rating agencies assign credit ratings that influence pricing and investor perception.

Regulators – SEBI sets disclosure norms, while RBI monitors monetary policy impact on yields. Stock exchanges provide the trading platform and enforce post‑trade surveillance.

The issuance begins with the issuer appointing a merchant banker who prepares the offer document, obtains a credit rating and files a prospectus with SEBI. The prospectus discloses coupon, tenure, redemption terms and risk factors.

After SEBI clearance, the bond is listed on a stock exchange and offered to investors through a book‑building or fixed‑price method. The issue price is set based on prevailing market yields, the issuer’s credit rating and investor demand.

Once the issue is fully subscribed, funds flow from investors to the issuer, and the bonds are credited to investors’ demat accounts. The entire process typically follows a T+0 settlement for the primary issue.

After issuance, bonds move to the secondary market where they are bought and sold on exchanges or over‑the‑counter (OTC) platforms. Prices are driven by changes in interest rates, credit spreads and macro‑economic news.

Trading follows a T+2 settlement cycle: the buyer’s account is debited and the seller’s account credited two business days after the trade. The depositories (NSDL/CDSL) ensure electronic transfer of ownership, reducing settlement risk.

Liquidity is measured by turnover volume and bid‑ask spreads. For the exam, remember that a narrow spread indicates a liquid bond, while a wide spread signals lower liquidity and higher transaction costs.

Bond yields translate price movements into a percentage return. The most common measures are Current Yield and Yield to Maturity (YTM). Current Yield uses the annual coupon and current market price, while YTM accounts for all future cash flows until maturity.

Yield curves, plotted by SEBI‑approved data providers, show the relationship between yields and maturities. An upward‑sloping curve signals higher rates for longer tenors, whereas an inverted curve may indicate expectations of falling rates.

Exam questions often ask you to compute current yield or to interpret a shift in the yield curve. Remember that a rise in market yields leads to a fall in bond prices, and vice‑versa.