India’s government bond market has remained shallow while the corporate bond market has been restrictive to participants. Several committees have tried to look at policy changes, but have met with little success. Mint explores the importance of corporate bond market.
What is the corporate bond market?
A corporate bond is typically a debt instrument that is issued by a firm to its investors. A company raises money from the investors at a specific rate of interest and promises to repay the money over a period of time from its operations. The bond holder receives a pre-determined number of interest payments till the maturity of the bond, at which time the original investment is returned. Now, a market where investors and companies interact with each other for issuing of corporate bonds or for buying or selling of bonds by investors is essentially called a corporate bond market.
Why is the corporate bond market crucial?
Globally, corporate bond markets witness higher trading volumes and liquidity because there are enough market participants even for low rated bonds. The bulk of infrastructure projects and long-term investments are financed through these markets. However, in India, the lack of well-developed bond markets put the pressure of financing investments on India’s banking system or government expenditure. This pressure on banks is problematic as financing long-term investments creates an asset-liability mismatch. Moreover, bad assets in the system are due to banks being the primary source of finance for all investments.
Why did the Indian bond market fail to develop well?
In India, most bonds are not issued publicly because of the extensive declarations that are required for the process. Consequently, companies prefer private placements, which can be made to a maximum of 50 “qualified institutional buyers”. They require less documentation and it is easier to address a change in interest rates.
Why is there an interest in Indian bond market?
There have been 91 debut bond issuers so far this year, including Patanjali Ayurved Ltd. The renewed interest in bond market is due to improved credit conditions as a result of measures taken by the government. Moreover, bonds are cheaper than bank credit. Recent stimulus measures across the world have resulted in record low levels of yield, which has further reduced the cost of debt significantly. Many expect the regime of low interest rates and low bond yields to persist for some time. These factors are behind the interest in bond market.
Has covid accelerated the corp bond market?
The renewed interest by firms is because of the measures taken by the government over the last few years to deepen the bond markets in India. The pandemic and the resultant stimulus have reduced the yield, which has encouraged firms to issue bonds. Increased participation by retail investors in financial markets during the pandemic is also an encouraging sign for the development of India’s financial sector. The low yields are an opportunity to undertake steps that can accelerate development.
Karan Bhasin is a policy researcher.