Key Facts and Data Points

  • Corporate bond market size: Rs 53.6 trillion in FY2025 (≈12% CAGR since FY2015).
  • Share of GDP: 15‑16% (vs. US >80%, South Korea 79%, Germany 55‑60%).
  • Bank exposure: Banks hold 60‑65% of non‑financial corporate debt.
  • Recapitalisation since 2017: Over Rs 3.2 lakh crore.
  • Liquidity: Annual turnover ratio of secondary market ~0.3.

Background and Context

India’s financial system remains heavily bank‑centric. In mature economies, long‑term corporate financing is largely sourced from deep bond markets, allowing risk diversification. The shallow Indian corporate bond market forces banks to act as the default warehouse for credit risk, leading to asset‑liability mismatches and constrained monetary‑policy transmission.

Reforms Introduced in Union Budget 2026‑27

  • Market‑Making Framework: Designated intermediaries to provide continuous two‑way quotes for corporate bonds.
  • Total‑Return Swaps (TRS): Synthetic exposure to bond returns without owning the underlying security.
  • Bond‑Index Derivatives: Futures and options on corporate bond indices to enhance hedging and liquidity.
  • Infrastructure Risk Guarantee Fund: Partial credit guarantees for infrastructure projects during development and construction phases.
  • CPSE Asset Monetisation via REITs: Unlocking under‑utilised real‑estate assets of Central Public Sector Enterprises.
  • De‑risking Infrastructure Finance: Encouraging private participation by improving bankability of high‑risk projects.

Challenges Faced by Banks

  • Structural Over‑burden of Risk: 60‑65% of corporate debt on banks vs. ~30% in the US.
  • Asset‑Liability Mismatch: Long‑gestation projects financed with short‑term deposits.
  • Fiscal Dependency: Re‑capitalisations transferring private losses to the public balance sheet.
  • Constrained Lending Capacity: Capital tied up in long‑term loans reduces funds for SMEs, exporters, and first‑time borrowers.
  • Impaired Monetary‑Policy Transmission: Banks reluctant to adjust rates due to long‑term exposure.

Further Steps Needed to Deepen the Market

  • Corporate Bond Repo Market: Centrally cleared repo facility to use bonds as collateral.
  • Greenium Incentives: Preferential treatment for ESG‑linked corporate bonds.
  • Bond‑Only Project Finance: Mandate a share of infrastructure financing through bonds.
  • Corporate Bond CDS Index: Enable macro‑level credit risk hedging.
  • Retail‑Focused Corporate Bond Savings Certificates: Low‑denomination, tax‑beneficial products to mobilise household savings.

Significance for India

  • Risk Diversification: Shifts credit risk from banks to a broader investor base.
  • Liquidity & Price Discovery: Derivatives and repo markets improve secondary‑market activity.
  • Infrastructure Funding: REITs and bond‑only financing unlock CPSE assets and attract private capital.
  • Sustainable Finance: Green bond incentives align with climate goals.

Related Constitutional/Legal Provisions

  • Article 246 (State List & Union List) – Union’s power to legislate on banking, securities, and financial markets.
  • Companies Act, 2013 – Provisions for issuance of debentures and bonds.
  • Securities and Exchange Board of India (SEBI) Act, 1992 – Regulatory framework for bond markets and derivatives.

Conclusion

The 2026‑27 budget marks a strategic pivot from a bank‑centric financing model to a market‑driven corporate bond ecosystem. Effective implementation of the announced reforms, coupled with additional measures, can enhance financial stability, deepen capital markets, and support sustainable economic growth.