Zero-Coupon Bonds Lose Market Charm

What’s Behind the Fall in Popularity?

Zero-coupon bonds are losing investor interest as market dynamics shift and liquidity priorities change, altering traditional investment behaviors.

In the world of finance, there’s often a delicate dance between risk, return, and timing. One such example is the recent cooling interest in zero-coupon bonds (ZCBs)—once a darling of long-term investors, now increasingly sidelined. But why are these “deep discount” instruments falling out of favor?

Let’s break it down in simple terms.

What Are Zero-Coupon Bonds?

Imagine you lend someone ₹1,000 but they promise to pay you ₹1,500 five years from now—no monthly interest, no coupons, just a lump sum at the end. That’s essentially how zero-coupon bonds work. They are sold at a discount and redeemed at face value.

Investors liked them for their predictability and long-term gains. But today, that appeal is fading.

Why Investors Are Shifting Away

Several key trends are pushing investors toward more liquid and flexible options:

• Liquidity matters more now. With tighter financial conditions and changing Reserve Bank of India (RBI) policies, investors are preferring instruments that offer regular payouts or easy exits.
• Wider spreads = higher uncertainty. The spread between short- and long-term government securities is widening. This indicates that the market is unsure about future interest rates or economic conditions.
• RBI’s monetary tightening. The RBI’s move to reduce excess liquidity, including its Cash Reserve Ratio (CRR) hike, makes long-dated, interest-deferred instruments like ZCBs less attractive.

In economics, this is a clear case of opportunity cost at play. When better or safer returns are available elsewhere, investors rethink locking their money into a zero-coupon bond for years.

What This Says About the Broader Economy

ZCBs are typically popular when:

• Interest rates are falling
• Inflation is under control
• Long-term certainty is high

But in today’s climate, none of those conditions apply.

The yield curve—an economic indicator that compares short- and long-term interest rates—has flattened or even inverted at times, which is often a sign of upcoming economic uncertainty. A wide yield spread now reflects market nervousness and expectations of continued interest rate hikes.

Moreover, inflation remains a concern. When inflation eats away at future purchasing power, getting money now (through interest payments) becomes more attractive than waiting for a lump sum later.

A Closer Look: The Investor’s Dilemma

Let’s say Ananya, a young professional, is planning for a future house purchase. She wants her money to grow safely over five years. A ZCB might have looked good a year ago. But with rising inflation and no cash flows until maturity, she now prefers a mutual fund or a fixed deposit with regular interest income.

Why? Because she needs liquidity and flexibility—both of which ZCBs lack in the current environment.

This shift is happening across the board. In fact, the 5-year G-sec yield minus 10-year G-sec yield spread has narrowed significantly, with short-term rates rising faster than long-term ones. That’s a red flag for long-term, fixed-return products.

The Big Picture: Time for a Strategy Reset?

Investors and institutions are rebalancing portfolios to align with:

• Shorter maturities
• Higher liquidity instruments
• Better inflation hedging options

This could mean more demand for floating rate bonds, money market instruments, or even short-duration funds.

From a macroeconomic lens, this shift reflects expectations of tighter monetary policy and a more cautious investment climate. As the real interest rate (interest rate minus inflation) becomes less favorable, long-duration investments like ZCBs lose their shine.

Key Takeaways

• Zero-coupon bonds are falling out of favor due to rising interest rates and uncertain economic conditions.
• Investors now prefer instruments with better liquidity and periodic returns.
• The shift is a reflection of opportunity cost and inflation expectations in today’s economic environment.

While ZCBs aren’t disappearing, they’re clearly no longer the go-to choice for cautious or liquidity-conscious investors. And that tells us a lot about how people are reading the economic tea leaves in 2025.

Rights Issues Make a Comeback

How SEBI’s New Rules Are Fueling a Capital-Raising Boom

Rights issues are back in the spotlight as SEBI’s new rules simplify the process. Find out how this change is helping firms raise capital faster.

Imagine you’re a business owner, and you need cash to expand—but you don’t want to lose control of your company or pay high interest. What if you could raise funds from the very people who already believe in your business? That’s what a rights issue does—and thanks to a recent rule change, this once-sidelined method is suddenly hot again.

What Exactly Is a Rights Issue?

A rights issue allows listed companies to raise money by offering new shares to existing shareholders, usually at a discount. It’s like offering your loyal investors the first chance to buy more ownership before opening it up to outsiders.Let’s say you own 10% of a company. If they issue more shares and you don’t buy in, your stake gets diluted. But with rights issues, you can buy more and maintain your share—often at a bargain price.

Why It Was Ignored… Until Now

Rights issues used to be like waiting for a train in the middle of nowhere. The process was slow—up to 317 working days, full of paperwork and delays. That made companies turn to faster, flashier options like private placements or bank loans.

But in April 2025, SEBI (India’s stock market regulator) made a sharp move. It cut the timeline to just 23 working days. That’s like switching from snail mail to WhatsApp.

Here’s what changed:

• Faster approval and allotment
• A seven-day subscription window
• Easier trading of rights entitlements
• Simplified disclosures

The result? A rights issue is now faster and cheaper, without giving away control to new investors.

Numbers Don’t Lie

In May 2025, companies raised ₹4,188 crore through rights issues—the highest in over a year. Major players like Mahindra & Mahindra Financial Services (₹2,996 crore) and Lloyds Engineering (₹987 crore) led the charge.

And it’s not just a one-month blip:

• January 2024: ₹4,198 crore
• April 2025: ₹799 crore
• May 2025: ₹4,188 crore (with 4 issues opened)

We’re seeing both a spike in value and a rise in the number of companies opting for rights issues.

Why It Makes Sense Economically

From a microeconomics angle, think of rights issues as a way to lower transaction costs and avoid agency problems. Instead of borrowing from banks (which introduces creditor control), companies stick with shareholders who already understand their risk.

There’s also a game theory element here. By offering discounted shares to current investors, companies incentivize participation—and because shareholders don’t want to lose their stake, they often buy in.

On a macroeconomic level, when rights issues become easier, capital flows more freely. Companies can raise money to invest, expand, or innovate—without increasing debt. That’s especially helpful when interest rates are high or when markets are cautious.

What’s in It for Young Investors?

If you’re a young professional or a retail investor, rights issues offer:

• Discounted shares in companies you already trust
• A chance to increase your stake before outsiders do
• Liquidity, since rights entitlements can often be traded

But there’s a catch. Not all rights issues are golden. If a company is struggling, the rights offer may be a red flag. So always check why the funds are being raised.

Final Thoughts

Rights issues have gone from being the forgotten stepchild of capital markets to the new favorite. Thanks to SEBI’s smart rulebook changes, companies can now raise money faster, with less red tape—and investors can grab more value along the way.

If you’re a business owner or a finance-savvy millennial, keep an eye on this trend. Whether you’re raising capital or investing it, rights issues might just be your best route forward

Why States Want More Tax Share

States demand a bigger share of central taxes to boost local development. Here’s why it’s becoming a loud economic and political debate.

Rising Voices, Growing Needs

Imagine running a household where 59% of your salary is controlled by someone else. You ask for money, but they decide how much you get. That’s exactly how Indian states feel when it comes to tax revenue distribution.

Currently, the Indian government shares 41% of divisible tax revenue with states. But now, there’s growing demand—led by the BJP-ruled Uttar Pradesh and supported by several others—to increase it to 50%.

Why this sudden clamor? Let’s break it down.

The Economics Behind the Demand

Under India’s federal structure, the Centre collects most of the taxes—like income tax and GST—and then distributes a portion to the states. The idea is rooted in the principle of fiscal federalism, where resources are shared to meet the specific needs of regions.

However, states argue that their expenditure responsibilities—healthcare, education, infrastructure—have grown much faster than their revenue streams.

Here’s where the imbalance lies:

• Centre gets 59% of the tax pool
• States get 41%, but are responsible for delivering most public services

This mismatch often leads to delays in welfare schemes, patchy roads, underfunded schools, and even salary delays for local government employees.

More States, More Voices

Out of 28 Indian states, 21 have backed this push for a larger share. They’re not just asking for more money—they’re asking for more autonomy.

Some key demands include:

• Increasing states’ share from 41% to 50%
• Earmarking 10% of tax revenue for the 8 Northeastern states
• Compensation for forest cover conservation
• Special funds for states with difficult terrains or insurgency

Interestingly, these demands come from both BJP-ruled and Opposition-ruled states, showing that this issue transcends party lines.

The Hidden Tax: Surcharges and Cesses

Another major grievance is the growing use of surcharges and cesses by the Centre. These are taxes collected outside the divisible pool—meaning states don’t get a share.

For instance:

• Health cess
• Infrastructure cess
• Education cess

These now make up over 18% of the Centre’s gross tax revenue. That’s like collecting rent from tenants but not sharing it with your business partner who owns 40% of the building.

What This Means for You

If you’re a young professional or a business owner, you might wonder: how does this affect me?

Let’s say you’re an entrepreneur in Assam. If your state had a higher share of tax revenue:

• Better roads could cut your logistics costs
• Local grants could fund your start-up
• Skilled labor programs could improve workforce quality

Or imagine you’re a software engineer from Mizoram. With more funds, your state might invest in broadband infrastructure, helping your hometown join the digital economy.

In economic terms, this is about resource allocation efficiency. When local governments—who understand local needs better—get more money, they can invest it more productively. That leads to higher marginal returns on every rupee spent.

The Centre’s View: A Balancing Act

Of course, the Centre has its own responsibilities—defense, national highways, international diplomacy. It also needs to redistribute resources to poorer states through central schemes.

Too large a share for states may weaken the Centre’s ability to function effectively, especially in times of crisis like a pandemic or war.

So the real debate is not just about percentages. It’s about finding the right balance between central coordination and state-level flexibility.

Looking Ahead

The 16th Finance Commission, led by Arvind Panagariya, is reviewing these demands and will submit its recommendations by October 31. Whether or not the 50% mark is granted, one thing is clear—the call for fiscal decentralization is growing louder.

In the long run, empowering states fiscally may lead to a more responsive, competitive, and inclusive economy.

And that’s something worth taxing our minds over.