Corporate bond markets in India: A study and policy recommedations

Abstract

Vibrant, deep and robust corporate bond markets are essential to enhance stability of financial system of country, mitigate financial crises and support the credit needs of corporate sector, which is vital for the growth of an economy. A study of corporate bond market experiences across developed and emerging markets such as US, EU, Japan, China, Malaysia, Korea and New Zealand further underscores the importance of strong institutional and regulatory framework, along with support from policymakers for building robust corporate debt markets Our review of research and policy papers, by several high powered committees set up by the Ministry of Finance, on the corporate debt markets in India reveals that the absence of an efficient, liquid and vibrant corporate debt market in India. The lack of depth and efficiency in the corporate debt market is explained by inadequate infrastructure, illiquidity, regulatory gaps, limited investor and issuer base, absence of benchmark yield curve across maturities etc. Further the reports explore and advocate various means to resuscitate the corporate debt markets, mostly in the context of institutional and regulatory reforms. Recent trends reinforce the need for strong policy measures to develop the corporate debt markets in India. Corporate Debt has been in existence in India since independence and one would have expected a flourishing market by now. Yet that has not been the case. The corporate debt to GDP ratio is approximately 5% while the same for bank debt to GDP is 36%. This ratio lags behind even other emerging market economies. The size of the overall bond market is barely 55% of the GDP which is nowhere comparable to developed economies. The institutions have taken a few steps in this direction and corporate debt markets are viewed as a priority area by all the concerned regulators. There have been attempts to introduce new structured and securitized debt instruments along with corresponding derivatives though the evidence reveals that they are not favored by investors. We also observe a stagnant investor base compounding the problem of bond market liquidity.