India's corporate bond market to more than double by FY30: CRISIL

After clocking a compound annual growth rate (CAGR) of around 9% over the past five fiscals, the Indian corporate bond market appears set for even faster growth, according to CRISIL Ratings.

The rating agency expects the outstanding size of the bond market to more than double from ₹43 lakh crore as of last fiscal to ₹100-120 lakh crore by fiscal 2030.

"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," says Somasekhar Vemuri, senior director, CRISIL Ratings.

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, it says.

CRISIL foresees a capex of around ₹110 lakh crore in these sectors between fiscals 2023 and 2027, around 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 around 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, the rating agency says.

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 around 30% of GDP last fiscal, way smaller than that in the developed nations. Retail credit in the US, for instance, was around 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.

CRISIL says the revised risk weights announced by the Reserve Bank of India (RBI) for bank exposure to NBFCs can tilt their funding mix in favour of bonds.

This comes at a time when 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.

“The RBI and SEBI 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,” says Ramesh Karunakaran, director, CRISIL Ratings.