In a decade, the amount of corporate bonds outstanding has increased four times, reaching Rs40 lakh crore

25 Aug 2022 , 07:59 AM

According to an RBI official, the primary market, which has increased to Rs40 lakh crore in a decade, should be further developed because the secondary corporate loan market’s lack of liquidity is a global problem.

In his remarks on Wednesday, Reserve Bank deputy governor Rabi Sankar noted that thanks to the government and regulators’ combined efforts, the total amount of corporate bonds outstanding has increased from Rs10.4 lakh crore in March 2012 to Rs40 lakh crore as of March 2022. At the same time, the number of annual issuances has increased from Rs4 lakh crore to Rs6 lakh crore.

The secondary market volume surged from Rs4.4 lakh crore to Rs14 lakh crore during the same time period.

Only the US has a secondary corporate bond market that is extremely liquid, with India coming in second with a turnover ratio of 69.

Because corporations and municipalities, which make up a very small portion of the US population, dominate the market, it is extremely large. However, the corporate bond market as a proportion of GDP is also at its highest in the US, at 120, while it is only 18% in India, compared to 80% in Korea and 36% in China, according to Sankar.

The central banker attributed the small size of issuances, which average Rs 130 crore per issuer, the nature of the issue, which is a private placement as opposed to a public offering in other markets, and the low holdings, which are primarily restricted to institutional investors and not retail investors as in the case of the US, as well as the pricing and interest rate risks that any issuer of corporate bonds must contend with, to name a few.

He did acknowledge that the main disadvantage is the almost complete lack of a derivative market in this area, but given that CDS (Corporate Default Swap) regulations are in place, things should get better going forward. The development of novel products, such as floating rate debt instruments, should be another enabler.

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