The Indian corporate bond market can become liquid if problems such as entry costs, information asymmetry, and the absence of a secondary market are addressed, according to the Economic Survey for 2024-25.

The Survey noted that the regulatory prescription that disallows insurance and pension funds from investing in bonds that are lower than “AA” rated effectively crowds out small players in the corporate bond market.

“Liquidity is also bottled through regulations that prevent provident funds from investing in corporate bonds for more than 3 years. Moreover, insurance funds are not allowed to invest in debt issued by private companies,” the ES said.

Primary bond issuances gain traction

The Survey underscored that domestic corporate debt marketcontinued to gain significant traction during the year. The value of corporate bond issuances stood at ₹7.3 lakh crore from April to December 2024, with an average monthly issuance of ₹80,000 crore, higher than the average of ₹66,000 crore in the corresponding period of the previous year.

Private placements remained the preferred channel for corporates, accounting for 99.1 per cent of total resources mobilised through the bond market.

The ES opined that increasing investor demand and elevated costs of borrowing from banks have made these markets more attractive for corporates for funding requirements.

Debt market remains undercapitalised

The Survey highlighted that in contrast to the equity market, the debt market in India remains undercapitalised. As a percentage of GDP, the corporate bond market is only 18 per cent in India, as opposed to 80 per cent in Korea and 36 per cent in China.

The market for corporate bonds comprises high-end bonds, with 97 per cent of corporate bond issuances concentrated in the top 3 rating categories (AAA, AA+ and AA).

“Issuers who are unable to get these ratings are unable to access the bond market. This may explain why most issuers are NBFCs or public sector undertakings (PSUs),” the Survey said.

Private placement

The ES stated that an overwhelming majority of corporate bond issuance happens through the route of private placement, which actively deters the participation of retail investors. In FY24, the public placement of corporate bonds stood at ₹19,000 crore against the private placement of around ₹8.38 lakh crore.

Related Topics