Indian corporate bond market grows four-fold in FY22

Some interesting aspects of the changing face of the Indian bond market came out during a speech delivered by the RBI deputy governor, Rabi Sankar. He was addressing the Bombay Chamber of Commerce & Industry. A key point made by Ray at the event was that the total corporate bonds outstanding had grown from Rs10.4 trillion in March 2012 to Rs40 trillion in March 2022, a four-fold growth in ten years. Ray also added that the secondary market volumes had also grown from Rs4.4 trillion to Rs14 trillion during the same period. 

Annual issuances of corporate bonds had also risen to nearly Rs6 trillion, which is extremely appreciable in a market where government securities still dominate the overall bond market mix. The point that Ray was making was that the all the ingredients of a robust bond market was already there in India. The government securities market was worth $1 trillion while the corporate bond market was also growing. However, due to a number of restrictions, the turnover of the bond markets still remained very low.

Ray has also compared the Indian bond market with the other developed and EM bond markets in terms of the share of the bond market size as a percentage of GDP. For instance,, the corporate bond market as share of GDP is as high as 120 in the US, while in India it is just about 18%, showing low penetration. Even compared to 80% in Korea and 36% in China, the Indian corporate bond markets are almost paltry in size. However, Ray expressed confidence that this situation would change once there are more corporates participating in the bond markets.

But the Indian corporate bond market is still too small in comparison to the government securities market and that is where the big challenge comes. Ray also pointed to the lack of quality AAA rated paper in India as a key reason for the paucity of corporate bonds that are actively traded. According to Ray, only about 20% issuers of corporate bonds are AAA rated, around 78% are AA-rated and close to 1.5% are junk-rated. Ray also added that the large number of privately placed issues was also impeding the developing of bond market. 

Ray also pointed out that while there is a robust derivatives market for equities and commodities, there is no such market for the corporate bonds. Normally, existence of derivatives contracts enhances opportunities in the form of hedging, scalping, arbitrage etc. India does have trading in interest rate futures, but that is very small in size and has very little application for the bond markets in practice. The introduction of CDS contracts should be a good start and should pave the way for derivatives in the bond markets too.