After clocking a compound annual growth rate (CAGR) of ~9% over the past five fiscals, the Indian corporate bond market appears set for even faster growth. CRISIL Ratings expects outstanding size of bond market to more than double from ~Rs 43 lakh crore as of last fiscal to Rs 100-120 lakh crore by fiscal 2030.

Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “The growth will be driven by a confluence of factors. While large capital expenditure (capex) in the infrastructure and corporate sectors, growing attractiveness of the infrastructure sector for bond investors and strong retail credit growth are expected to boost bond supply, rising financialisation of household savings should drive demand. Regulatory interventions are helpful, too.”

Capex in the infrastructure and corporate sectors is expected to be driven by decadal-high capacity utilisation, healthy corporate balance sheets and strong economic outlook. CRISIL foresees capex of ~Rs 110 lakh crore¹ in these sectors between fiscals 2023 and 2027, ~1.7 times than that in the past five fiscals. CRISIL Ratings expects this pace of capex to continue past fiscal 2027. The corporate bond market is expected to finance a ~sixth of the capex foreseen.

Infrastructure assets are becoming strong contenders for investment because of their improving credit risk profile, recovery prospects and long-term nature. Currently, infrastructure constitutes only ~15% of the annual corporate bond issuance by volume. But structural improvements aided by a raft of policy measures should make infrastructure bond issuances amenable to patient-capital investors - insurers and pension funds - the key investor segment in the bond market (for more information, refer to the CRISIL Ratings’ reports - ‘Building bonds’² and ‘A structural lift for infra LGD’³).

Retail credit growth is expected to maintain pace supported by private consumption growth and formalisation of last-mile credit flow. India’s retail credit market was ~30%⁴ of GDP last fiscal, way smaller than that in the developed nations. Retail credit in the US, for instance, was ~54% of its GDP at the end of calendar year 2022. Non-banking financial companies (NBFCs) complement banks to ensure credit flow to untapped segments. The bond market, being a key funding source for the larger NBFCs and accounting for a third of the funding mix, will play an important role in funding retail credit flow. In addition, the revised risk weights announced by the Reserve Bank of India (RBI) for bank exposure to NBFCs⁵ can tilt their funding mix in favour of bonds.

On the demand side, India is increasingly witnessing financialisation of savings, or a move away from physical assets (such as real estate and gold) to financial assets. The money getting financialised is increasingly being invested in capital market products. Among financial assets, managed investments⁶ have clocked a ~16% CAGR, compared with ~10% CAGR for bank deposits over the past five years.

Managed investments are expected to continue to grow faster than bank deposits. Factors such as increased digitalisation, rising investor sophistication in terms of retirement planning, higher awareness and use of insurance, investment objective aimed to beat inflation, and a growing middle-income population are contributing to the growth of managed investments.

CRISIL estimates assets in the managed investment segment to double to ~Rs 315 lakh crore by fiscal 2027, and the trend is expected to continue well past fiscal 2027. These investments will be in both equity and debt and good portion of it may flow to the corporate bond market (for more information on this topic refer CRISIL’s report - ‘The big shift in financialisation’⁷).

Regulatory intervention is also supporting the growth.

Says Ramesh Karunakaran, Director, CRISIL Ratings, “The RBI and SEBI⁸ have already mandated large borrowers to tap the corporate bond market for incremental borrowings. The recent launch of the Corporate Debt Market Development Fund and the setting up of AMC Repo Clearing Ltd by SEBI will help in improving the secondary market liquidity for institutional investors and thereby boost investor confidence. Growth may get a leg up if the regulators address some key issues, such as relaxing the investment restrictions on corporate

¹ Source – CRISIL’s India outlook report 2023 – ‘Rider in the storm’
² https://www.crisilratings.com/en/home/our-analysis/reports/2022/09/building-bonds.html
³ https://www.crisilratings.com/en/home/our-analysis/reports/2023/09/a-structural-lift-for-infra-lgd.html
⁴Credit from banks and NBFCs to the retail segment
⁵ Risk weights for bank exposure to NBFCs rated ‘A’ category and above was increased by 25%
⁶ Insurance, mutual funds, retirement funds (PF and NPS), alternative investment funds, and portfolio management services
⁷https://www.crisil.com/en/home/our-analysis/reports/2022/12/the-big-shift-in-financialisation.html
⁸ Securities and Exchange Board of India