Deep equities, shallow bonds: Govt bets on market makers to bridge the gap

In a bid to deepen India’s corporate bond market, Finance Minister Nirmala Sitharaman on Sunday proposed a series of measures, including the introduction of a market-making framework, derivatives on corporate bond indices, and total return swaps on corporate bonds.

Despite rising participation by Indian households in equity markets, their engagement with corporate bonds and debt-oriented investment products remains limited. One of the key reasons is poor liquidity. The average daily trading volume in the secondary corporate bond market ranges between ₹7,000 crore and ₹10,000 crore, significantly restricting exit options for investors.

Another structural constraint is the limited investor base. Primary bond issuances are dominated by a small group of institutional investors, which in turn restricts the availability of bonds for trading in the secondary market.

India’s corporate bond market is also heavily skewed towards highly rated issuers, with nearly 85–90% of issuances coming from AAA- or AA-rated entities. In contrast, the United States has a far more diversified and liquid corporate debt market, where less than 5% of issuances are AAA-rated, while over 60% fall within the A and BBB categories.

Further, private placements dominate bond issuances in India, with limited public offerings. This structure discourages participation by smaller firms and retail investors. Major issuers continue to be public sector undertakings (PSUs), public financial institutions and banks.

While presenting her ninth consecutive Union Budget, Sitharaman said, “I propose to introduce a market-making framework with suitable access to funds and derivatives on corporate bond indices. I also propose to introduce total return swaps on corporate bonds.”

Unlike the equity market, India’s corporate bond market remains at a nascent stage, accounting for only 15–16% of GDP, compared with equity market capitalisation of over 130% of GDP. Participation is not only limited domestically but also low relative to peer economies.

Corporate bond markets account for nearly 79% of GDP in South Korea, 54% in Malaysia, and around 40% in both China and the United States, respectively. Notably, while India ranks fifth globally in equity market capitalisation, South Korea — ranked tenth in equities — and Malaysia — ranked 28th — have far deeper corporate bond markets relative to their economic size.

The Economic Survey for FY26 observed that limited retail participation has slowed the development of a robust, market-based debt ecosystem capable of efficiently channelling long-term capital to the real economy.

That said, India’s corporate bond market has witnessed steady growth over the past decade, expanding at an annualised rate of 12% from ₹17.5 lakh crore in FY15 to ₹53.6 lakh crore in FY25.