Development of the corporate debt market in India and the impact of introduction of CDS on the corporate debt market

Abstract

A vibrant corporate debt market is critical for the financing needs and healthy growth of any economy. Indian corporate bond market has come a long way since the liberalisation of the economy in 1991. Initially, corporate loans were the norms with both the banks and the corporate showing confidence in the mode of financing. However, this mode was less efficient with low levels of price discovery as well as inefficient costs being levied upon the corporates. The landscape started changing in late 90s when corporate like Reliance issued corporate bonds for the first time. Today the corporate bond trading volume is over Rs.50,000 crores with health growth expected to be sustained in the future. However, when compared to international standards, these volumes are far too slow for a growing superpower like India. Keeping this task in mind, the RBI recently announced several measures including the allowance of Credit Default Swaps (CDS) in Indian markets. In this paper, we have tried to cover various aspects of corporate debt market as well as the impact of CDS on them. CDS are a double edged sword. They are advantageous as they provide the much needed market depth, liquidity, investor protection, etc. But as seen in the recent credit crisis, these instruments are less transparent and fraught with moral hazard and in the absence of regulation can prove to be disastrous for an economy. The authors have focussed their attention on how to extract the maximum for CDS towards developing the Indian corporate debt market.