Corporate Bond Market: Lack of depth, high margin norms impeding development of corporate bonds market

The lack of depth in credit derivatives and the high margin requirements for corporate bonds repo have been stumbling blocks for the development of a strong bond market in India, said RBI deputy governor T Rabi Sankar.

“Efforts need to focus on improving complementary – repo and derivative – markets, diversify the investor base, both domestic and global, and improve access of borrowers at the lower end of the credit spectrum,” Sankar said at the Bombay Chamber of Commerce & Industry on Wednesday.

Derivatives and repo markets could well play a role in helping the corporate bond market to gain momentum as those are billed as popular hedging tools for sophisticated investors betting on bonds sold by companies. “Beyond this, market development and improvements will remain a continuous exercise,” he said.

Diversifying investor base and access to lower rated companies to raise bonds will help develop the corporate bond market, which is still small among major Asian emerging markets, including Malaysia, Korea and China, according to the RBI deputy governor.

However, the corporate bond market has progressed well, although the secondary market volumes are still low.

The outstanding stock of corporate bonds has increased four times – from ₹10.51 lakh crore at the end of FY2012 to ₹40.20 lakh crore at the end of FY2022.

“As much as we need to take these steps, it will serve us well to temper our expectations on the degree of liquidity in secondary corporate bond markets,” he said.

The absence of risk appetite beyond top-rated bonds is billed as another key impediment. In 2021-22, ratings were assigned to 1,235 corporate debt securities amounting to ₹22.55 lakh crore.

The skew is much more pronounced when looked at in value terms – 80% of issuances in value terms were rated AAA and another 1.5% were rated AA. “While we can discuss the reasons for this trend, it is clear that the corporate bond market largely meets the needs of highly-rated corporates,” Sankar said. If international experience is anything to go by, the best we can achieve may be well short of the liquidity we are used to in government bond markets or equity markets, he added.

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