Executive summary

Two years back, in August 2016, a committee headed by former Reserve Bank of India (RBI) Deputy Governor H R Khan had made a series of recommendations for the domestic debt market, including changes in regulations, policies, market infrastructure, and innovation as prerequisites to its deepening.

With most of these recommendations getting implemented, the impact is beginning to show: between March 2016 and 2018, corporate bonds outstanding increased ~1.36 times.

In terms of liquidity, average daily trading has almost doubled in the past five years, with the exception of certificates of deposit (CDs), where it has declined due to lower supply.

Growth was also fuelled by a declining interest rate cycle and demonetisation, which led to a liquidity surfeit.

But there are miles to go in terms of footprint on the economy. At less than a fifth of its $2.4 trillion gross domestic product (GDP), India’s corporate bonds outstanding hardly registers on the global radar.

Structurally, the debt market remains firmly skewed towards government securities (G-secs). And the corporate bond marketremains largely about top-rated financial and public sector issuances.

The good part is, the domestic corporate bond market has done fairly well, fuelled by higher demand as a larger share of financial savings get channelled into the capital market, and favourable supply conditions have emerged because of mounting pressure of non-performing assets (NPAs) at banks.

Successful implementation of the Insolvency and Bankruptcy Code (IBC), the RBI’s large borrower framework for enhancing credit supply, the Securities and Exchange Board of India’s (SEBI) bond market push for large borrowers, and increasing acceptability of innovation and complexity by investors should lead to more diverse issuers, which would engender a deeper market.

If India is to see rapid economic growth over the long term – which isan absolute social necessity – the corporate bond market will haveto play a pivotal role as a funding source.

Over the five fiscals through 2023, CRISIL expects corporate bond outstanding to more than double to Rs 55-60 lakh crore, compared with ~Rs 27 lakh crore at the end of fiscal 2018, driven by large infrastructure investment requirements, growth of non-banking financial institutions, regulatory push, and the inability of banks to crank up corporate lending because of capital constraints.

However, demand is expected to be only for Rs 52-56 lakh crore, driven by higher penetration of mutual funds (MFs) and insurance products, increasing retirement subscriptions, growth in corporate investments, and increasing wealth of high networth individuals (HNIs).

As a result, there would be a substantial gap of Rs 3-4 lakh crore between demand and supply of corporate bonds in the next five fiscals.

A slew of measures are required to bridge this gap, and ensurehealthy demand-supply dynamics.

While the reforms done so far have been progressive, we need moreof it, and then some fine-tuning.

Both facilitations and market infrastructure need to be apace, forthe stakes are very high.