India’s Bond Market Debate Needs a Wider Lens

As India enters a phase of large-scale green infrastructure expansion, energy transition, urbanisation, and industrial transformation, the quality of its bond markets will increasingly shape the trajectory of its development. The recent publication of Indian Bond Market: Structure, Conduct and Macroeconomic Impact by Geetima Das Krishna and Biswajit Nag is therefore timely, as it situates debt markets within the broader framework of economic transformation rather than treating them as a narrow technical segment of finance.

The problem, however, goes deeper than the underdevelopment of the corporate bond market itself.

India’s financial system remains structurally organised around relationship-based finance rather than market-mediated finance. That distinction explains why repeated reform efforts have produced only incremental changes in the corporate bond ecosystem.

Why the Existing Model Has Reached Its Limits
Historically, Indian finance evolved around banks, development finance institutions, and concentrated institutional intermediation. Credit allocation occurred primarily through negotiated relationships rather than transparent market pricing of risk. Public-sector banks became the dominant source of long-duration financing, particularly for infrastructure.

This model served an important purpose during earlier stages of India’s development. But the financing requirements of large-scale infrastructure and energy-transition investments are fundamentally different.

Infrastructure assets are long-duration assets. Financing them through shorter-duration banking liabilities inevitably creates structural mismatches. India has experienced these pressures repeatedly through cycles of stressed infrastructure lending, restructuring, and non-performing assets.

The issue, therefore, is not merely how to mobilise larger volumes of capital. It is about creating mechanisms that enable risk and capital to move efficiently through the lifecycle of infrastructure assets. That requires moving away from static balance-sheet finance toward systems in which capital continuously flows from completed assets into the creation of new infrastructure.

In relationship-based systems, lending decisions remain negotiated, secondary-market discipline remains weak, and capital tends to remain locked within institutional balance sheets for long periods.

Market-mediated finance operates differently. It relies on transparent disclosures, tradable risk, dispersed investor participation, and continuous market pricing of credit quality. Risk is distributed rather than concentrated, allowing capital to move across different stages of the asset lifecycle.

Why India’s Corporate Bond Market Remains Weak
Nearly 95–98% of corporate bond issuances in India continue to occur through private placements rather than public issuance. This reflects the underlying incentive structure of the financial system itself.

Public bond markets impose disciplines that negotiated institutional borrowing often does not. Public issuance requires continuous disclosures, transparent valuation, and regular investor scrutiny. By contrast, privately negotiated financing permits lower disclosure burdens and reduced exposure to market discipline.

In such a system, firms naturally gravitate toward the financing channel that imposes the least friction and scrutiny. The result is a market in which issuance occurs without a fully developed trading ecosystem.

Deep bond markets depend on investors being able to buy, sell, and price risk efficiently. The IL&FS episode exposed many of these structural weaknesses. Investors relied excessively on ratings rather than continuous market assessment of risk. Secondary-market signals remained weak. When confidence deteriorated, liquidity collapsed abruptly rather than adjusting gradually through market mechanisms.

This reflected a broader institutional problem: India’s financial system still relies disproportionately on negotiated confidence rather than continuous market scrutiny.

Circular Finance and India’s Emerging Savings Base
InvITs and Infrastructure Debt Funds are often discussed primarily as monetisation or refinancing vehicles. Their deeper significance lies in enabling capital recycling.

Capital should not remain permanently locked within mature or de-risked assets. It should migrate across different stages of the project lifecycle in response to changing risk profiles.

At the early stage of infrastructure creation, projects may require development finance institutions, sovereign support, or strategic capital willing to absorb construction and policy risk. Once projects become operational and generate predictable cash flows, these assets should progressively migrate toward pension funds, insurance funds, and other long-duration investors through capital-market structures.

Capital released from mature assets can then be recycled to create new infrastructure.

This becomes especially relevant in India, where long-term domestic savings are expanding rapidly. India’s pension pool is estimated at nearly ₹70 trillion when EPFO, NPS, government pension systems, and other retirement savings are aggregated. Household financialisation, meanwhile, remains in its early stages, with fewer than 10% of Indian households currently participating in securities markets.

These trends are creating large pools of patient capital seeking stable long-duration investment opportunities. Infrastructure assets are well suited to long-duration institutional capital — provided the financial system can connect long-term savings with long-term assets through transparent and liquid market structures.

Reform Must Shift the Incentive Structure
Much of the current reform discourse remains excessively technical — deeper repo markets, market-making systems, electronic platforms, and disclosure standards. These reforms are necessary, but they will remain insufficient unless the underlying incentive structure also changes.

The first area requiring attention is RBI’s credit architecture. India’s financial system continues to favour concentrated bank intermediation over market intermediation. Large corporates often find bilateral institutional borrowing easier, faster, and less disclosure-intensive than accessing public debt markets.

The objective should not be to weaken banks, but to reduce the structural asymmetry between negotiated institutional borrowing and publicly traded market borrowing. RBI’s prudential and provisioning frameworks should progressively encourage the migration of operational infrastructure assets from bank balance sheets to capital-market structures through take-out financing, securitisation, and other structures that progressively transfer operational assets from bank balance sheets to capital markets.

A second reform challenge concerns SEBI’s approach to bond-market development. India’s bond reforms remain excessively issuance-centric even though investors participate only when exit mechanisms are credible.

SEBI’s next phase of reform must therefore focus more aggressively on secondary-market liquidity through market-making frameworks, standardised issuances, continuous trade reporting, electronic liquidity platforms, and wider repo eligibility for corporate bonds.

The third challenge concerns pension and insurance regulation. Globally, deep bond markets are anchored by long-duration institutional investors. India now possesses the savings base, but regulatory investment norms remain overly conservative and heavily dependent on ratings.

PFRDA, EPFO, and IRDAI frameworks should gradually enable calibrated participation in infrastructure bonds, credit-enhanced structures, and operational asset platforms. Countries such as Chile, Malaysia, and South Korea deepened their bond markets only after creating large classes of domestic duration-holding investors.

India also needs to reduce excessive dependence on ratings by strengthening continuous market assessment of credit risk. This requires stronger disclosures, better bond analytics infrastructure, covenant transparency, mandatory dissemination of secondary-market trades, and eventually a deeper repo and credit-derivatives market capable of supporting continuous pricing of credit risk.

Finally, India’s infrastructure-financing mechanisms — InvITs, Infrastructure Debt Funds, municipal bonds, and securitisation structures — must evolve into an integrated financing ecosystem that enables continuous recycling of capital rather than functioning as isolated financing instruments.

The Next Stage of India’s Financial Evolution
The deeper issue, therefore, is not merely diversification of financing sources. It is whether India’s corporate bond market can evolve from a narrow institutional funding channel into a genuine mechanism for continuous capital recycling.

That transition is critical because India’s next phase of infrastructure and industrial expansion cannot rely indefinitely on concentrated bank intermediation and static balance-sheet finance. It requires financial structures that enable long-term domestic savings to continuously flow into productive assets through transparent, liquid, and tradable market mechanisms.