India must overhaul corporate bond market architecture: NITI Aayog

NITI Aayog warns India's shallow corporate bond market could constrain investment-led growth and calls for sequenced reforms to deepen liquidity, broaden investors and cut regulatory frictions

In a bid to mobilise long-term, low-cost capital to sustain its growth ambitions, NITI Aayog on Thursday called for a sequenced and harmonised reform strategy to deepen the country’s corporate bond market, cautioning that the current scale and structure could become a bottleneck to investment-heavy growth.

 

Releasing a report titled “Deepening the Corporate Bond Market in India”, Aayog chief executive officer and former commerce secretary B V R Subrahmanyam said India’s reliance on bank credit for corporate funding increases systemic risk and limits access for underserved sectors, especially MSMEs. He noted that only about one-sixth of India’s corporate debt comes from bonds, compared to global peers where bond markets often surpass equity in size. “In India, the equity markets are seven times the size of our corporate bond market. That tells you the gap in financing,” he added.

 

 

The corporate bond market, seen as an alternative to bank finance for borrowers, helps companies raise long-term funds at competitive costs.

 

India’s corporate bond market, at approximately 16 per cent of gross domestic product (GDP), remains modest compared to developed economies, indicating untapped potential in mobilising long-term capital, according to the Centre’s official policy think tank.

 

The think tank identifies several structural challenges impeding the growth of the corporate bond market, such as regulatory overlaps, extensive disclosure requirements that deter lower-rated issuers, limited participation from retail and foreign investors and a shallow secondary market with low liquidity.

 

“The corporate bond market remains concentrated among top-rated issuers, with private placements dominating issuance and limited participation from MSMEs, retail investors and foreign portfolio investors. This structural imbalance constrains access to affordable capital for smaller firms and reduces overall market liquidity,” the Aayog said.

 

To address these issues, NITI proposes a three-phase reform strategy over a six-year horizon. The initial phase focuses on streamlining regulations, enhancing coordination among regulators and improving legal clarity. The report states, “Efforts will be made to strengthen market infrastructure through digital access, reliable credit ratings and robust trading platforms.”

 

Over the medium to long term, the Aayog recommends deeper structural reforms and institutional capacity-building. “Regulatory frameworks will evolve to support a unified architecture, more effective resolution mechanisms and a conducive environment for innovation,” it observed.

 

Subrahmanyam also stressed the importance of broadening investor participation, including greater integration of foreign investors and improved transparency. He highlighted the need for targeted incentives and educational initiatives to increase retail investor awareness and participation. “We need to allow new types of bonds to come into the market such as green transition bonds, energy bonds, rural development bonds, MSME bonds, etc,” he added.