Illiquidity in secondary corporate debt market is a global issue and so focus should be on further deepening primary market that has grown nearly four-fold in a decade to Rs 40 lakh crore, an RBI official said. Addressing a Bombay Chamber of Commerce & Industry event on Wednesday, Reserve Bank deputy governor Rabi Sankar said the concerted efforts by regulators and government have seen corporate bond outstanding has crossed Rs 40 lakh crore as of March 2022 from Rs 10.4 lakh crore in March 2012, while annual issuances rose to Rs 6 lakh crore from under Rs 4 lakh crore during this period. During the same period, the secondary market volume spiked from Rs 4.4 lakh crore to Rs 14 lakh crore. Addressing a Bombay Chamber of Commerce & Industry event on Wednesday, Reserve Bank deputy governor Rabi Sankar said the concerted efforts by regulators and government have seen corporate bond outstanding has crossed Rs 40 lakh crore as of March 2022 from Rs 10.4 lakh crore in March 2012, while annual issuances rose to Rs 6 lakh crore from under Rs 4 lakh crore during this period.
Only the US has a very liquid secondary corporate bond market and India has the second best, which is very low, though the turnover ratio is 69 here. The US market is very deep because it is led by corporates and municipalities, which is a very small in the country. But corporate bond market as percentage of GDP is also the highest at 120 in the US, while in India, it is only 18 per cent as against 80 per cent in Korea and 36 per cent in China, Sankar said. The US market is very deep because it is led by corporates and municipalities, which is a very small in the country.
Lack of secondary market liquidity is global and not just specific to India, of course barring the US. "Our turnover ratio is 69, which is only second to the US given this we need to relook our approach to secondary market instead of focusing on the secondary market liquidity. This is primarily because of the small size of issuances which is only Rs 130 crore," Sankar said. Compared to government bond market, which has an outstanding of Rs 80 lakh crore across 100 issues (though only 10 are actively traded), there is a large number of corporate bonds issuers of around 5,400. Such large issue of primary issuances naturally dries up the secondary market, he explained. Compared to government bond market, which has an outstanding of Rs 80 lakh crore across 100 issues (though only 10 are actively traded), there is a large number of corporate bonds issuers of around 5,400.
On the rating profile of the issuers, he said, around 20 per cent issuers are AAA rated, around 78 per cent are AA-rated and just 1.5 per cent are junk-rated. Sankar blamed the large number of privately placed issues for the skewed incentive structure towards the public issues which also get wider investor base. "So the way forward is not to excessively worry about market liquidity but to widen the investor base and also there is a need to temper our expectations from the bond market." Sankar blamed the large number of privately placed issues for the skewed incentive structure towards the public issues which also get wider investor base.
The central banker attributed the shallow secondary market to multiple factors such as the small size of issuances that averages at Rs 130 crore per issuer, the nature of the issue which is being private placement as against public issues in other markets, the low holdings which are mostly limited to institutional investors and not retail as in the case of the US, and the pricing and interest rate risks that any corporate bond issuer face. However, he admitted that the near-absence of a derivative market here is the biggest drawback, but given that the CDS (Corporate Default Swap) norms are in the way forward should be better. Another enabler should be the introduction of new instruments like floating rate debt instruments. However, he admitted that the near-absence of a derivative market here is the biggest drawback, but given that the CDS (Corporate Default Swap) norms are in the way forward should be better.
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