India's debt market needs to get its mojo back, says Mihir Vora of TRUST Mutual Fund

Mihir Vora, Chief Investment Officer at TRUST Mutual Fund

"We need to rekindle that dynamism within the debt market while ensuring proper regulation," said Mihir Vora, Chief Investment Officer at TRUST Mutual Fund. Reflecting on the historically vibrant bond market in India during the ’80s and ’90s, Vora noted how companies once issued liquid and tradable bonds in significant volumes, albeit under minimal regulation.

Speaking at the SEBI SAMVAD Symposium, Vora highlighted concerns about the complexities of debt market settlement and the challenges posed by multiple trading systems. "The plethora of platforms and systems, each regulated by different bodies, is a significant issue for the industry that needs to be addressed," he said.

Vora also shared his personal findings to highlight the issue, "I asked my debt fund managers and traders how many systems they use daily. They listed 12 platforms, excluding newswires. There’s a pressing need to unify these systems."

Quantifying the impact of fragmented systems, Vora drew a stark contrast between the bond markets in India and the US. "For instance, in the US, the bond market is three to four times the size of the loan market, while in India, it’s the reverse. In the US, corporate bond turnover is about 2x annually, whereas in India, it’s only 0.3x," he said.

Vora also shed light on a contrasting trend in India’s equity market, which rivals global markets in terms of trading volumes, settlement efficiency, and advancements like T+1 and T+0 settlement cycles. "The bond market, however, lags significantly," he stated.

"Although the corporate bond market grew at a 12 percent CAGR over the past decade, growth slowed significantly after 2018 due to risk aversion following certain incidents. Pre-2018, the market grew at 16 percent CAGR, but this dropped to 8-9 percent afterward, even below nominal GDP growth. This increased risk aversion affects regulators, investors, and institutions alike," he added.

On the limited participation of insurance companies in the corporate bond market, Vora explained that their portfolios are constrained by regulatory requirements, which prioritise safer assets like government securities and highly rated bonds. Conversely, banks, with their superior credit assessment skills, lack long-term liabilities. "Bridging this gap remains essential for the development of the corporate bond market," he added.

Additionally, Vora addressed the low retail participation in corporate bonds, attributing it to tax disadvantages compared to equity investments. "Addressing this disparity through tax incentives can encourage broader participation," he said.

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