India's bond market needs to be seven times larger to match global standards, says NITI Aayog

According to BVR Subrahmanyam, CEO of NITI Aayog, who released a comprehensive report on deepening the corporate bond market on Wednesday, the sevenfold expansion will support the country's growth ambitions and provide investors with stable, long-term financing options.

Speaking at the release of "Deepening the Corporate Bond Market Report," Subrahmanyam highlighted a striking disparity. While India boasts world-class equity markets, its corporate bond market lags far behind, measuring just one-seventh the size of equity markets. In contrast, the United States has a corporate bond market larger than its equity markets.

"We have one of the most efficient stock markets in the world," Subrahmanyam said, praising the National Stock Exchange as world-class. "But in comparison, the debt markets in India are largely still controlled by banks. Banks mediate the bulk of debt funding in India."

The NITI Aayog chief emphasised that the underdeveloped bond market poses a potential bottleneck to India's economic growth, particularly as the nation works toward becoming a developed economy. Infrastructure, housing, and other long-term investments require long-term financing--funding that typically comes through bond markets rather than equity.

Currently, only one-sixth of India's corporate debt comes from bonds. Large, creditworthy companies can easily issue bonds and raise capital, but small and medium enterprises, MSMEs, and companies without long track records struggle to access this financing avenue.

"A lot of India is yet to be built," Subrahmanyam noted. "Long-term funding is not equity. Long-term funding, most of the time, is actually debt funding, which has to come through the bond market."

The numbers tell a stark story. India's corporate bond market stands at approximately $650 billion, while the United Kingdom--an economy India surpassed two years ago to become the world's fifth-largest--has a bond market exceeding $4 trillion, roughly six times larger than India's.

"An economy which is roughly the same size as ours has a bond market which is six times ours," Subrahmanyam said. "So there is huge scope."

The report identifies multiple systemic obstacles hampering the development of India's corporate bond market across four key areas.

Institutional and Regulatory Constraints: Insurance and pension funds face stringent investment limits, primarily limited to AA-rated or higher bonds, which reduces capital flows to non-banking financial companies and infrastructure special purpose vehicles.

The credit rating agency market is highly skewed, with AAA- and AA-rated issues accounting for approximately 94% of the market, while below-AA-rated bonds constitute only 16%.

This concentration leaves mid-sized firms struggling due to weak credit histories and inadequate credit assessment tools. Additionally, hedging instruments for interest rate and credit risk remain underdeveloped, illiquid, and sparsely adopted.

Issuance Framework Gaps: Overlapping regulations from multiple authorities--SEBI, RBI, and the Ministry of Corporate Affairs--create compliance burdens and cause significant delays. The report notes that bond issuance in India takes 20 to 60 days, compared with 1 to 5 days in the United States and the United Kingdom.

Corporate bonds also tend to have shorter tenors than government securities, limiting their appeal to long-term investors and contributing to a weak secondary market with a persistent bias toward AAA-rated bonds.

Market Infrastructure Deficiencies: Banks dominate as arrangers, with low participation from non-banking financial companies and brokers. Most over-the-counter trades rely on bilateral settlement, with Delivery-versus-Payment mechanisms limited to exchange-traded bonds.

Multiple siloed databases maintained by RBI, SEBI, and various exchanges provide inconsistent, unreliable, and delayed data. While India has developed a robust 10-year yield curve, the market beyond that remains thin and illiquid, affecting the pricing of long-term bonds.

Limited Retail Access: Private placements dominate the market, accounting for 98% of issuances, severely limiting retail investor access and resulting in significantly lower retail participation than in countries such as Thailand, Japan, and the United States.

The report highlights a critical lack of awareness and investor education, with information primarily driven by brokers rather than systematic educational initiatives.

The CEO emphasised how the underdeveloped bond market limits options for individual savers seeking stable returns without equity market volatility.

Currently, Indians can invest in bank fixed deposits or equity markets through mutual funds, but have virtually no opportunity to invest in corporate bonds.

The report outlines a six-year implementation plan divided into three phases, with recommendations including better regulatory coordination, improved market infrastructure, increased bond issuance, and the introduction of innovative bond types such as green bonds, energy transition bonds, rural development bonds, and MSME bonds.

Technology will play a crucial role, mirroring the success of equity market platforms. "Use technology massively, as we did with NSE, so that it becomes easier for investors," Subrahmanyam said.

The roadmap prioritises more manageable initial steps: coordinating with regulators, developing market infrastructure, supporting issuers in issuing more debt, and allocating innovation to bring new bond types to market. Government underwriting for certain bond categories may also be explored.

He expressed confidence that if the recommendations are implemented, the bond market could see explosive growth within four years. "By the time we finish phase two, four years from now, the bond markets can explode, become very deep," he predicted. (ANI)