Whalesbook
India’s corporate bond market has reached Rs 59 trillion but lags behind global peers due to complex tax rules and low trading liquidity. A new report highlights that simplifying taxation and broadening the investor base are key to unlocking deeper capital markets.
What Happened
India’s corporate bond market has grown significantly to reach Rs 59 trillion in size by the end of the 2026 fiscal year, a major jump from Rs 18 trillion in 2015. However, a recent analysis by CareEdge Ratings suggests that the market’s true potential remains locked. Despite this growth in total value, the sector is struggling with structural issues like unfavorable tax structures, low activity in the secondary market, and a lack of diverse investors. The report argues that to reach the next level of development, India needs to make it easier for both domestic and foreign investors to trade these bonds.
Why This Matters For Investors
Most Indian companies rely heavily on bank loans for their funding needs. When the bond market is small and inactive, companies are forced to go to banks for credit. If the bond market were more active and liquid, companies could raise money directly from investors at potentially better rates, freeing up bank capital to lend to smaller businesses. For investors, a deeper bond market would offer more ways to diversify portfolios beyond just stocks and bank fixed deposits. Currently, the market is heavily tilted toward the safest, highest-rated bonds, which limits options for investors looking for different risk-reward profiles.
The Secondary Market Liquidity Problem
Liquidity in the bond market—the ability to buy or sell a bond quickly without affecting its price—is a major hurdle. In India, most investors, such as banks and large insurance companies, follow a buy-and-hold strategy. They buy a bond and keep it until it matures, which means very few bonds are ever traded in the open market. This is evident in the numbers, where the trading-to-outstanding stock ratio in India sits at 0.2%. For comparison, this ratio is significantly higher in countries like the UK and the US, where active trading helps determine fair prices and keeps the market healthy. Low trading activity makes it difficult for investors to exit their positions if they need cash before the bond matures.
Taxation And The Investor Base
CareEdge points to current tax policies as a key reason for the market’s sluggishness. High tax deducted at source (TDS) and tax treatments that are not in line with other investment assets discourage many investors. The report suggests that rationalizing these taxes could attract a broader base of participants. Currently, the market is dominated by government securities, which account for nearly 75% of total debt. Corporate bonds remain a minor part of the picture, representing only about 16% of India's GDP, compared to 40% in the United States and 36% in China. This gap shows that there is significant room for expansion if the regulatory and tax environment becomes more favorable.
The Risk Of Concentration
There is a notable concentration risk in the Indian corporate bond market. Over 85% of all issuances are concentrated in the highest-rated categories—AAA and AA. This happens because pension funds and insurance companies are strictly regulated on where they can put their money, often forcing them to stick only to the safest instruments. While this keeps the risk low, it creates a bottleneck where companies with slightly lower credit ratings—which might still be viable and growing—struggle to raise funds through bonds. Expanding the rules to allow these institutional investors to allocate a portion of their funds to A-rated bonds could improve market depth and provide capital to a wider range of businesses.
What Investors Should Track
Investors and market observers may watch for any changes in government policy regarding debt taxation. Any move to reduce TDS or simplify tax treatment for corporate bonds would be a positive signal for market liquidity. Additionally, keep an eye on regulatory updates from bodies like SEBI, as they frequently introduce new platforms and rules to increase transparency and trading on the exchange. Finally, monitoring the participation levels of foreign portfolio investors will be crucial, as their entry can bring much-needed volume and global standards to the local market.