Whalesbook
Structural Issues Plague India's Bond Market
Despite India's corporate bond market growing to ₹59 lakh crore, it suffers from a structural problem: a heavy reliance on institutional investors who typically hold bonds until maturity. This 'buy-and-hold' approach severely limits trading on the secondary market. Although trading volumes in FY26 increased by 30% to about ₹22.07 lakh crore, the overall turnover remains low. This lack of depth hinders efficient price discovery, leading to volatile yields for corporate issuers and making bank lending a more predictable option for borrowing costs.
Tokenization Aims to Improve Access and Settlement
The Securities and Exchange Board of India (SEBI) is piloting a bond tokenization framework, inspired by global digital settlement successes. The goal is to speed up the issuance and settlement process and potentially allow for fractional ownership by retail investors. While SEBI has lowered the minimum investment for corporate bonds to ₹10,000 to encourage retail participation, the absence of strong, transparent secondary trading platforms remains a barrier to broader retail investment in debt. Tokenization could create the needed infrastructure to bring retail capital into the corporate credit market, which is currently dominated by private placements.
Risks and Competition from Bank Loans
Unlike the highly liquid equity markets, India's corporate bond market faces significant credit and liquidity risks. SEBI's move to require stricter disclosures for listed debt-only entities is an effort to rebuild investor confidence after past defaults. The market is also divided; top-rated companies can still access funds easily, but those with lower ratings face higher borrowing costs due to economic uncertainties. Many corporations continue to prefer bank loans over bonds, seeking the certainty and flexibility in pricing and refinancing that banks offer, directly competing with the capital markets.
Path Forward for Debt Markets
Bringing India's debt market infrastructure up to global standards is a long-term project. Market participants are keenly awaiting the results of the tokenization pilot. The success of these reforms will be measured by tighter bid-ask spreads and a more diverse investor base. SEBI's focus is on ensuring that the market's growth leads to a functional, stable, and accessible system that can support India's long-term funding needs.