Representative Image / Pexels

Among different asset classes perched on various branches of Risk- return profile, the safest haven is the fixed income category, comprising of bonds, FD, PPF, corporate debt, G sec and the like.

Among, different brethren of fixed income universe, the least talked about is the corporate bond market in India, Before the onset of liberalization, India saving architecture nudged households towards tax incentivized avenues. Consequently PPF, small saving scheme and bank fixed deposits ruled the roost.

Before the onset of liberalization, the corporate bond market, or for that matter the debt market itself was virtually absent. India had a captive debt market for government securities. Statutory Liquidity Ratio (SLR), served as an important mechanism to channel credit towards financing the government fiscal deficit. Interest rates were administered rather than market determined. Commercial banks were both de-jure and de-facto principal buyers of government securities.

The financial sector reforms provided a ray of hope, with market determined interest rates were set free from the labyrinth of SLR driven capacity.

As debt markets gathered pace, policymakers and skeptics alike hoped, that Indian debt market will evolve on lines of mature markets, like Japan and USA and provide an alternative source of long-term finance to bank credit.

The broad reforms introduced by government were setting up STCI as a market maker, providing a robust framework for primary dealing system, widening the investor base. the government played its part well

Fast forward to 2026, the corporate bond markets still languish in anonymity. They have emerged neither as a distinct asset class, nor a promising source of long-term finance, fulfilling long term growth aspiration of India Inc.

It has been overshadowed by equity markets. Ironically in time like these where equity markets provided returns no better than fixed deposits, a well-developed corporate market would be a ray of hope.

What then ails the corporate bond market? Why did the reforms in this sector never gained momentum? Clearly one needs to look yonder to find the missing link.

The fault perhaps lies in the very architecture of India financial system. The landscape was dominated by development finance institutions which were transformed into commercial banks. The retreat of development finance institutions was to be eventually filled by robust corporate bond market. Paradoxically, this vacuum was increasingly occupied by commercial banks that continued to expand long term credit portfolio.

While equity markets continued to gather pace and through vibrant IPO, a slew of reforms and a strong regulator. The corporate bond market grew at incremental and lackadaisical manner. Today the market has few coveted PSU bonds and even fewer corporate issuance to narrate the saga of a market that has struggled to come of age. It is beset by narrow investor base, poor secondary market liquidity, negligible retail participation, and wider credit spread over G-Sec 

To add to these structural infirmities came the IL&FS crisis, the proverbial last straw on the camel's back—laying bare the vulnerabilities of India's debt market. Can the corporate bond market then continue to remain the forgotten child, especially at a time when India stands on the cusp of two defining milestones?

As the nation embarks on its journey towards a $10 trillion economy, with infrastructure expected to provide the growth momentum, how long can it continue to rely on a predominantly bank-centric source of finance?

Equally, in an environment where equity markets have turned increasingly volatile, often disappointing investors over extended periods, and interest rates appear to be hardening, is it not time to accord the corporate bond market the place it has long deserved? A deep and vibrant corporate bond market is no longer a desirable adjunct to the financial system; it is an economic imperative.

The time is here and now to reinvigorate corporate bond market. Rather than treating it as a child of lesser god, the government needs to fast track reforms to increase retail participation, infuse investor confidence. This can be done by calibrated mix of fiscal incentive and institutional support, such that it stands as an equal partner to banks and equity markeets.

 

 

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of New India Abroad.)

Discover more at New India Abroad.