India’s corporate bond markets have seen a healthy growth in the last few years, supported by several structural and cyclical factors. As a result, the share of bond markets in incremental funding to the corporate sector has more than doubled over the past five years till 2016-17. A series of favourable steps taken by regulators and policy makers to broaden the bond markets has been one of the key influences.
Today’s budget speech indicate that the government continues to be focused on developing bond markets. Three steps that were announced can significantly expand the role played by the corporate bond markets over the medium term.
These are a) nudging large corporates to meet 25% of their funding needs through bond markets; b) considering regulatory recognition for investment in bonds to include A rated bonds as well (in addition to existing stipulations of only up to AA rating); and c) attempting to introduce uniform stamp duty for issuance of bonds across the country.
However, in the short term, a slower path towards fiscal consolidation can lead to higher interest rates, thus reducing the relative attractiveness of bonds vis-à-vis bank loans.
Yet this cyclical near-term disadvantage does not materially alter the impact of structural benefits that can arise from the other three measures, if and once they are implemented. These include more number of issuers accessing bond markets, availability of greater investment opportunities for investors, and greater ease and efficiency in the issuance process.
We believe that couple of additional steps can add further shine. These include establishment of a bond guarantee fund to provide credit enhancements for lower rated bonds, and regulatory recognition to the recently launched expected loss (or EL) scale for infrastructure projects.
- By Pawan Agrawal, Chief Analytical Officer, CRISIL Ltd