Temper Expectations On Liquidity In Secondary Bond Markets: RBI's T Rabi Sankar

Efforts to develop India's corporate bond markets need to focus on improving complementary markets, diversifying the investor base, and improving access of borrowers at the lower end of the credit spectrum, according to the RBI Deputy Governor T Rabi Sankar.

With respect to liquidity, the secondary trading has not risen in consonance with the size of the market, he said in a speech on Wednesday. "It will serve us well to temper our expectations on the degree of liquidity in secondary corporate bond markets," he said.

However, the challenges in development of liquidity in bond markets are not unique to the corporate bond markets in India, he said. Even while comparable data on turnover ratios of corporate bond markets of different jurisdictions are not readily available, approximate assessments do not indicate that the Indian corporate bond market lags its peers in respect of secondary market liquidity, he said.

The market regulator SEBI has been progressively making efforts to nudge the market towards reissuances, in a bid to reduce fragmentation and improve liquidity in corporate bond markets–limiting the number of corporate bonds that could mature in any financial year, Sankar said.

The constraint is that a corporate does not have the tools available to a government to meet the rollover risk implicit in bunched-up repayment obligations that result from consolidation through reissuance, he explained.

Other factors that contribute to the limited activity in the secondary market are the “buy and hold” nature of investors and the predominance of private placement, Sankar said.

The market is dominated by highly rated issuers and largely meets the needs of highly rated corporates. While the numbers are skewed in favour of highly rated issuances, the skew is pronounced when looked at in value terms. For instance, in FY22, 80% of the issuances in value terms were rated AAA and another 1.5% were rated AA, Sankar said.

The second issue relates to the mode of issuance. The bulk of corporate bond issuances every year is through the private placement route rather than through public issuances.

The investor base for corporate bonds is, as can be expected given the market micro-structure, largely dominated by domestic institutions–insurance companies, banks and mutual funds. Retail participation in corporate bonds remains low in India and globally.

What is somewhat unique in India is that investors in debt-oriented mutual funds–which is the avenue through which the retail investor participates in debt markets globally–are also largely institutional, he said. Foreign participation in corporate debt has not been favourable to secondary market activity, he said.

A number of Indian corporates have been tapping international markets to raise environmental, social and governance funding while domestically such issuances have been low, Sankar said.

According to him, there is a need to look at factors impeding the development of the domestic market for ESG bonds and what needs to be done to attract the growing 12 global pool of ESG funds to the country.

He highlighted the need to create conducive conditions for ESG bonds–greater transparency, credible checks against greenwashing, including through arrangements for independent audits and a robust taxonomy for the market and bonds.

Factors impeding domestic appetite for issuances of capital bonds by banks in India also need to be looked at, he said.

The size of the corporate bond market in India, scaled by GDP, remains small compared to other major Asian emerging markets such as Malaysia, South Korea and China, the deputy governor said. But the market is growing steadily and reasonably given the traditional bank dominance, he said.

There has been feedback from market participants about the need for improving timeliness and integrity of data on primary and secondary market transactions in the corporate bond market, Sankar said. This is arguably a low-hanging fruit which we can aspire for, he said.

Apart from providing borrowers an alternative to bank finance, corporate bonds can lower the cost of long-term funding, Sankar said. An efficient corporate bond market with lower costs and quicker issuing time can offer an efficient and cost-effective source of longer-term funds for corporates, he said.