Market dynamics, risks and best practices in the Indian market
The Indian corporate bond market has grown
significantly in recent years, reaching ~Rs 53,63,555 crore outstanding as in
March 2025. This is a 13% jump from the previous year, driven by the increasing
demand for alternative sources of funding and the government's efforts to
deepen the bond market. There was a record high issuance Rs 11.03 lakh crore in
fiscal 2025, with average monthly ~300 issues. Lower borrowing costs following
the RBI’s interest rate reductions, banks' prudent lending practices that have
encouraged corporations to seek funding from the capital markets, and robust
institutional demand from MFs, insurance firms and FPIs.
the growing world of corporate bonds
Companies can raise funds via equity(IPO, FPO etc), debt(Bank loans, NCDs, CPs, public deposits) and internal accruals.
NCDs can be a better option for companies in specific situations due to the fixed interest rate, lack of equity dilution and stable funding source. These offer a better alternative to traditional bank loans since they allow longer tenures with alignment to the company’s asset-liability position, no dilution of ownership and control, diversified source of funding, fixed and predictable financing costs and greater flexibility. Additionally, NCDs allow companies to raise funds from a diverse set of investors, reducing their dependence on banks.
The corporate bond market in India is largely dominated by institutional investors such as insurance companies, pension funds and mutual funds. However, retail investors are increasingly turning to corporate bonds given the current rate-cut scenario and geopolitical uncertainties.
In a win-win situation, retail investors gain stability and returns, companies attain a stable source of funding since these investors tend to hold bonds until maturity. Moreover, retail investors can help deepen the bond market by increasing liquidity and reducing reliance on institutional investors.
Experts advocate a dual strategy of short-term high-yield corporate bonds combined with long-tenure government securities.
Various regulatory efforts to encourage retail participation are helping widen and deepen the bond market. For example, listed bonds are expected to see an uptick with the advent of online bond platforms. The move to reduce the ticket size of non-convertible debentures is also a positive.
Structure of the corporate bond market
The corporate bond market is a multi-layered ecosystem
comprising two main segments: the primary market (for new
issuances) and the secondary market (for trading existing
bonds). This structure is facilitated by key participants, essential
infrastructure and a robust regulatory framework.
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Market segments · Primary market - Public offerings: Bonds are offered to the general public, with investment banks often managing as underwriters - Private placements: Bonds are sold to a select group of institutional investors (e.g., banks, mutual funds or insurance companies), which is a common practice in the corporate market
- In the over-the-counter (OTC) market through dealer networks, though electronic trading platforms are increasingly used to enhance transparency
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Key participants
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Market infrastructure
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Trading platforms: Both physical (dealer networks) and electronic systems for trade execution |
Clearing and settlement systems: Entities that ensure the smooth and timely transfer of funds and securities, reducing counterparty risk. |
Trade reporting systems: Mechanisms for disseminating post-trade information to the market, increasing transparency |
Macro and micro factors affecting the bond market
There are several factors, both macro and micro, that influence the entire market and are generally beyond the control of individual companies or investors.
Macroeconomic factors include:
· Interest rates/monetary policy: This is a primary driver. Bond prices move inversely to interest rates. When central bank (RBI) raise interest rates to control inflation, new bonds are issued with higher yields.
· Inflation: A high inflation rate erodes the purchasing power of a bond's future fixed interest payments. Investors demand higher yields to compensate for this loss, which drives existing bond prices down
· Tax disparity: Debt instruments are often taxed less favourably than equities in some jurisdictions which can be a barrier to broader retail adoption
· Supply and demand dynamics: Large-scale government borrowing or a surge in new corporate bond issuances can increase the overall supply of bonds, potentially pushing yields up if demand doesn't keep pace
· Regulatory and fiscal policies: Government spending, borrowing policies and new regulations can affect the supply of bonds, economic stability and investor sentiment, thereby influencing the market
· Global/Domestic economic factors: Geopolitical events, trade relations and shifts in global interest rates can disrupt supply chains and affect corporate profits and investor confidence, impacting domestic bond markets
Microeconomic factors include:
· Credit rating/creditworthiness: This refers to an independent assessment of the issuer's ability to repay its debt. Bonds with higher credit ratings (e.g., AAA) are considered safer, carry lower default risk, and thus offer lower yields. A downgrade in an issuer's rating will increase the perceived risk, causing the bond's price to fall and its yield to rise
· Financial health of the issuer: A company's specific financial metrics, such as profitability, cash flow, capital structure (leverage) and debt-paying ability, directly influence its credit risk and, by extension, its bond pricing and yield
· Bond structure and features: Specific terms of the bond, such as its time to maturity, coupon rate (fixed vs floating), and call or put options, affect its value and sensitivity to market changes. Longer-maturity bonds are generally more sensitive to interest rate fluctuations
· Industry and sector trends: Developments within a specific sector, such as new competition or technological advancements, can impact the performance of companies within that industry, affecting the performance of their bonds
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Liquidity
concerns: Despite
improvements, the secondary market for corporate bonds still faces liquidity
constraints compared with G-secs, which can affect the ease and price of large
trades
Regulations that have
supported market growth
Several regulations have contributed to the growth and development of the corporate bond market in India, including:
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Electronic Bidding Platform (EBP): This is an online platform for bidding and allocation of bonds. The digitization ensures a transparent mode of bond placement |
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Request for Quote: The platform allows investors to request quotes from multiple dealers, ensuring transparency. SEBI has mandated mutual funds to make a share (initially 10% by value, increased to 25% for corporate bonds) of their secondary market trades through the platform |
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Face value: The minimum investment amount for retail investors has been reduced to Rs 10,000, making bonds more accessible. |
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Launch of online bond platform providers (OBPPs) and transparent guidelines: OBPPs (SEBIs regulation introduced in November 2022) have democratised the corporate bond market, previously dominated by institutional players, by offering user-friendly platforms and lowering the minimum investment threshold for privately placed bonds from Rs 1 lakh to as low as Rs 10,000. |
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Corporate Debt Market Development Fund (CDMDF): In August 2023, SEBI set up the CDMDF to act as a backstop facility for the purchase of investment-grade corporate debt securities from mutual funds during market dislocation. The implementation was in response to the liquidity crisis in the debt market amid the onset of the Covid-19 pandemic in April 2020. Now, mutual funds have the option to sell the investment-grade corporate debt securities to the CDMDF, in proportion to their contribution to the fund |
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Introduction of corporate bonds in the held-to-maturity (HTM) category for banks: The RBI recently amended its investment regulations for banks, allowing corporate bonds under the HTM category. It did away with the holding period (90 days) for securities under the held-for-trading category and the holding limit (23% earlier) for securities under the HTM category. This regulation came into force in April 2024 to deepen the corporate bond market by increasing bank participation. |
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Other regulations: Moreover, the RBI came up with regulations for setting up a limited purpose clearing corporation, potential risk class matrix, framework for debt passive funds and foreign portfolio investor (FPI) relaxations, all meant to deepen the bond market. |
A combination of monetary, economic and regulatory factors
have made the corporate bond market a lucrative one.
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Record issuances: The market saw record fresh issuances in the previous financial year (fiscal 2025) and is on track for continued strong issuances this fiscal with as companies increasingly turning to bonds as an alternative to traditional bank credit. Currently bonds with moderate duration with high credit ratings are in higher demand with multiple set of investors. |
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Monetary policy influence: RBI rate cuts implemented in early-to-mid 2025 have led to lower benchmark yields, encouraging corporates to issue debt at favorable rates. Expectations of further rate cuts are a key market driver |
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Increased retail and FPI participation: The market is transitioning from being dominated by institutional players to a more inclusive ecosystem. Online bond platforms have facilitated a significant increase in retail investor interest and participation, while FPIs also increased their holdings in fiscal 2025 |
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Trading volumes: AAA rated securities continued to be the forerunner in secondary trading volume among all categories commanding a ~77.3% share of the pie in fiscal 2025, an increase from ~76.6% share in the last fiscal. AA rated securities contributed ~16% in fiscal 2025 to the total trading volume. The demand for high rated securities continued to be most sought after in the last few fiscals amid ample liquidity for such securities in the secondary market. The average daily trading volume in corporate bonds rose above ~Rs 9,000 crore last fiscal and above ~Rs 11,000 crore this fiscal till early November. |
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ESG (environmental, social and governance) and green bonds: There is growing momentum for sustainability-linked bonds and green bonds, as companies focus on energy transition and infrastructure financing, attracting a dedicated class of ESG-focused investors |
Given such market and macro risks, going with a leader in a non-banking financial company (NBFC)-backed bond platform is crucial for enhanced security and transparency, and a wider range of high-quality investment options. These platforms offer the investor several key advantages.
· Enhanced credibility and security
· Better returns and liquidity
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Way forward for the bond market The Indian corporate bond market is expected to continue growing, driven by increasing demand for alternative sources of funding and government initiatives to deepen the market. To further develop the market, it is essential to: 1. Developing complementary markets: Fostering the growth of corporate bond repo and derivatives (like credit default swaps and bond index derivatives) markets, which allow for better risk management and funding. 2. Promoting market making: Encouraging more financial institutions to act as market makers by potentially adjusting capital requirements 3. Provide liquidity during challenging times: SEBI’s move on CDMDF is welcome, especially in providing stability to the corporate debt market and protecting investors in times of distress. However, the definition of market dislocations needs to be articulated to avoid ambiguity, especially in cases where issuers/securities are widely held by market participants and can impact the debt market. 4. Encourage retail participation: Retail participation in listed bonds will see an uptick with the advent of online bond platforms. The move to reduce the ticket size of NCDs is a positive. However, there needs to be more focus on investor education and awareness regarding corporate bonds. Also, in line with the equity market, reduction in tax slabs by the government and lowering of ticket size of private issuances to Rs 1,000 will encourage retail participation. 5. Optimizing institutional Investment: Allowing institutional investors (pension funds, insurance companies) greater flexibility to invest in a wider range of debt instruments, including lower rated ones with appropriate risk controls. 6. Introduction of debt-linked savings scheme (DLSS): The corporate bond market and investors will benefit from launching DLSS on the lines of equity-linked savings schemes (ELSS). DLSS will provide an alternative fixed-income option with tax breaks to retail investors and help them participate in bond markets at low costs and at a lower risk compared with equity markets. 7. Develop benchmark yield curve: There is a need to focus on developing the sovereign yield curve. Currently, only some tenures are very liquid. However, a liquid curve across tenures can act as benchmark for corporate bond pricing. 8. Strengthen market infrastructure: Regulators need to continue efforts to improve market microstructure, including using electronic platforms and settlement systems (equity market standards) Therefore, the Indian corporate bond market offers a viable alternative source of funding for companies and an attractive investment opportunity for investors. By understanding the market dynamics, risks and best practices, investors can navigate the market effectively and make informed investment decisions. |
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