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Indian Corporate Bond Market
The Indian corporate bond market has remained small in size despite a long history, several committee recommendations, and continuous reforms. It is besieged by several problems ranging from illiquid secondary market, narrow investor base, lack of diversity of instruments, crowding out by large public issuance, high costs of borrowing, information asymmetry, regulatory restrictions on demand, unavailability of repo options, to absence of well-functioning derivatives market and credit enhancement facilities that could absorb interest and default risks.
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“As more government debt floods markets, the relative safety and liquidity premium attached by investors to high-rated corporate bonds diminishes, raising the cost of borrowing, especially for AAA-rated borrowers, and making it relatively less sensitive to policy rate cuts,” warned outgoing Reserve Bank of India (RBI) deputy governor Viral Acharya1 on 23 June 2019. The study shows that as government debt to gross domestic product (GDP) ratio increases by 1 percentage point, the yields of the highest-rated (AAA) bonds increase by 2.3 percentage points. At the same time, the AA–AAA yield spread declines, contrary to the expectation of higher impact on yields of lower-rated bonds. This points to a crowding-out channel at work, especially for the cost of AAA-rated corporate debt. He further added,
Not only does government borrowing crowd out the private sector, but it can also induce the private sector to borrow more short-term, which can increase financial fragility. Might such forces have partly contributed to the surge in the asset-liability mismatch of the Non-banking Financial Companies (NBFC) sector for 12 months starting in the second half of 2017 when there was an upward revision in the quantum of government borrowings?
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