A Note on the Indian Corporate Bond Market

The Indian corporate bond market is poised for a spectacular rise after clocking a compound annual growth rate (CAGR) of 9% over the past five fiscal years. 

As per the findings of a prominent rating agency, the outstanding size of the bond market to more than double to Rs 100-120 lakh crore by fiscal 2023 from Rs 43 trillion as of the last fiscal.

Experts maintain that the large capital expenditure (capex) in the infrastructure and corporate sectors, growing affinity towards the infrastructure sector for bond investors and strong retail credit growth are anticipated to boost bond supply, and rising financialisation of household savings is likely to push demand. In addition, regulatory interventions are proving fruitful as well. 

Capex in the infrastructure and corporate sectors is anticipated to be driven by decadal-high capacity utilisation, robust corporate balance sheets and a positive economic outlook. 

The rating agency foresees a capex of Rs 110 lakh crore in these sectors between fiscal 2023 and 2027, 1.7 times than that in the past five fiscal years. It expects this pace of capex to continue past fiscal 2027. The corporate bond market is anticipated to finance a sixth of the capex foreseen.

Infrastructure assets are emerging as great avenues for investment because of their improving credit risk profile, recovery prospects and long-term nature. At present, infrastructure constitutes only about 15% of the annual corporate bond issuance by volume. 

However, structural improvements aided by the adoption of various policy measures should make infrastructure bond issuances amenable to patient-capital investors, insurance companies (insurers), and pension funds, the key investor segment in the bond market.

Retail credit growth is anticipated to retain a pace supported by private consumption growth and the formalisation of last-mile credit flow. 

The country’s retail credit market was 30% of the Gross Domestic Product (GDP) last fiscal, way smaller than that in developed nations. For example, retail credit in the USS was 54%  of its GDP at the end of the calendar year 2022. Non-banking financial companies (NBFCs) complement banks to ensure credit flow to newer segments. 

The bond market, being a key funding source for the larger NBFCs and accounting for a third of the funding mix, will play a crucial role in funding retail credit flow, as per the findings of the rating agency.