Tokenized bonds vs traditional bonds: How India’s new digital system changes bond trading and settlement for investors

India's bond market is undergoing a digital transformation through the introduction of tokenized bonds, which leverage Distributed Ledger Technology to streamline issuance and settlement. Major entities including REC, Larsen & Toubro, and IIFL have collectively issued ₹1,025 crore in tokenized debt to test the new framework. By utilizing the Reserve Bank of India's central bank digital currency (CBDC) and the Unified Market Interface, the system enables atomic settlement, where security transfers and payments occur simultaneously. This shift aims to reduce the traditional two-to-three-day settlement cycle and minimize reliance on multiple intermediaries. While the underlying financial characteristics like coupon rates and credit risks remain identical to traditional bonds, the use of smart contracts allows for the automation of interest payments and redemptions. Currently, the pilot program is restricted to institutional investors, with secondary market trading expected to commence via the Request for Quote platform. This development is significant for the RWA market as it demonstrates a sovereign-backed approach to tokenization using regulated depositories and central bank money rather than third-party stablecoins.