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Introduction

Obsession with equity markets must give way to nurturing less glamorous corporate bond markets.

Sharp movements in the Indian equity market may be par for the course. But when it comes to the market for corporate bonds, it’s as dull as ditchwater. Yet globally bond markets are much larger than equity markets. So why is the Indian corporate bond market in such a state of limbo? Could that remarkable Indian trait - fortitude - has rubbed off on our bond markets as well?

Not quite. The reason is far more prosaic: We don’t have a corporate bond market; at least not in the true sense of the term. There is a huge debt market where the turnover is many times the equity market. But this is overwhelmingly dominated by government securities (about 80% of the total). Of the remaining, close to 80% again comprises privately placed debt of public financial institutions.

The result is that the corporate bond market in India (especially when it comes to smaller players) is virtually non-existent and has remained so despite numerous attempts to bring it to life.

An efficient bond market helps corporate reduce their financing costs. It enables them to borrow directly from investors, bypassing the major intermediary role of a commercial bank. In the absence of a corporate bond market, a large part of debt funding comes from banks. Over-reliance on bank lending, moreover, exposes an economy to the risk of a banking crisis that could find companies being denied credit. An active and efficient bond market gives them an alternative means of raising debt capital in the event of a credit crunch. It also leads to better pricing of credit risk (since expectations of all market participants are incorporated into bond prices).

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* Contributed by -
Ankit Chetan & Sudhanshu Duggal,
National Institute of Industrial Engineering (NITIE),
Mumbai.