Answer

India’s corporate bond market is underdeveloped, constrained by limited participation, regulatory hurdles, and low liquidity. Addressing these challenges is crucial for enabling long-term business financing. Targeted reforms can unlock its potential for sustainable economic growth.

Challenges faced by India’s corporate bond market

• Low liquidity: Trading volumes are thin, making it hard to buy or sell bonds quickly without large price concessions.
  Example: In FY 2023-24, only 2% of corporate bonds were issued publicly (INR 19,000 crore), compared to 12% in 2014. Private placements dominated with INR 8.38 lakh crore.
• High entry barriers: Large minimum lot sizes and high transaction costs exclude retail investors and smaller institutions.
• Opaque information: Inconsistent disclosure norms and limited credit research create uncertainty about issuer quality.
• Underdeveloped secondary market: Lack of active market-making leads to wide bid-ask spreads and discourages participation.
• Concentrated investor base: Dominance by insurance and pension funds creates funding bottlenecks.
  Example: LIC alone subscribed the entire ₹50 billion 15-year bond by Adani Ports in May 2025.

Targeted financial sector reforms to strengthen the market

• Reduce minimum lot sizes and costs: Lower investment thresholds and streamline settlement charges to welcome retail and smaller institutional investors.
• Standardize and mandate disclosures: Enforce uniform, bond-level reporting and expand external credit ratings to enhance transparency and price discovery.
• Introduce tax incentives for bond funds: Exempt long-term bond fund gains to attract institutional and retail inflows.
  Example: U.S. municipal bond funds’ federal tax exemption supports a USD 4 trillion market.
• Build a sovereign corporate yield curve: Publish benchmark yield curves across rating categories to improve pricing benchmarks and risk management.
• Broaden the investor base: Ease participation rules for foreign and domestic investors—such as retail bond funds and fully fungible rupee accounts to diversify demand and stabilize funding.

Strengthening the corporate bond market through reforms will diversify financing options and enhance economic resilience. Improved infrastructure and investor confidence can drive market growth. A vibrant bond market is key to achieving inclusive and sustainable development.

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