An RBI official said liquidity in the secondary corporate debt market is a global issue and hence the focus should be on further deepening the primary market, which had grown nearly four-fold to ₹40 lakh crore in a decade.
Addressing an event of the Bombay Chamber of Commerce and Industry on Wednesday, RBI Deputy Governor Rabi Shankar said that due to concerted efforts of the regulators and the government, corporate bond dues have crossed ₹40 lakh crore as of March 2022. Which was ₹10.4 lakh crore in March 2012. While the annual issue increased from ₹4 lakh crore to ₹6 lakh crore during this period.
During the same period, the volume of the secondary market increased from ₹4.4 lakh crore to ₹14 lakh crore.
Only the US has a very liquid secondary corporate bond market and India has the second best, which is much lower, although the turnover ratio here is 69.
The US market is very deep as it is led by corporates and municipalities. But the corporate bond market as a percentage of GDP is also the highest in the US at 120, compared to only 18% in India, compared to 80% in Korea and 36% in China, Mr. Shankar said.
He said the liquidity crunch in the secondary market is global and not only specific to India, but excluding the US. “Our turnover ratio is 69, second only to the US; given this we need to revisit our approach to the secondary market, rather than focusing on secondary market liquidity. This is due to the small size which is only ₹130 crore,” said Mr. Shankar.
Compared to the government bond market, which has an outstanding of ₹80 lakh crore across 100 issues (though only 10 are actively traded), there is a sizable number of corporate bond issuers of around 5,400. He explained that such large primary issues naturally dry up the secondary market.
On the rating profiles of issuers, he said, about 20% of issuers are AAA-rated, about 78% are AA-rated and just 1.5% are junk-rated.
Mr. Shankar attributed a large number of privately held issues to the skewed incentive structure against public issuances, which also enjoy a wider investor base. “So the way forward is not to worry excessively about market liquidity, but to widen the investor base as well as reduce our expectations from the bond market.”
The central banker attributed the shallow secondary market to several factors such as the small size of the issuances which average ₹130 crore per issuer, the nature of the issue being primarily private placements in other markets as against public issues, low holdings which mostly are limited to institutional investors and not retail, as is the case with the US, and the pricing and interest rate risks that face any corporate bond issuer.
However, he acknowledged that the biggest drawback was the absence of a derivatives market here, but given that the CDS (Corporate Default Swap) norms are on the way ahead, it should be better. He said the introduction of new instruments like floating rate debt instruments should be another enabler.