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India’s bond market has been gaining momentum, reaching $2.69 trillion by December 2024, with corporate bonds alone accounting for over $602 billion, according to data from CCIL and SEBI, shared by IndiaBonds.com.
However, despite this expansion, bonds remain at just 0.65 times the equity market capitalisation, whereas in developed markets, bonds typically surpass equities by 1.2-2 times, as per the data shared.
Corporate bonds have been a key growth driver, rising 9% in INR terms over the past nine months, outpacing the overall bond market’s 6.5% growth.
Experts believe this momentum is critical as India targets a $7-8 trillion economy in the next five years, positioning corporate bonds as a major pillar of capital formation.
SEBI’s steps to deepen the bond market
SEBI has undertaken several initiatives to expand India’s bond market, focusing on increasing transparency and accessibility. Key measures include:
The online bond platform providers (OBPP) framework, introduced in 2022, which has structured the market for retail investors.
Lowering the minimum investment threshold from ₹1 lakh to ₹10,000, making bonds more accessible.
Mandating listing requirements for corporate bonds to improve secondary market liquidity.
Encouraging foreign investment by enabling India’s bond inclusion in global indices.
Despite these steps, liquidity remains a major bottleneck in secondary bond trading, restricting wider participation.
‘Retail investors need a structured distribution ecosystem’
While acknowledging SEBI’s efforts, Vishal Goenka, Co-Founder of IndiaBonds.com, stressed that a fundamental gap remains in bond market distribution.
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“The bond market lacks a structured distribution network, unlike equities and mutual funds, where brokers and mutual fund distributors (MFDs) facilitate retail participation. A well-defined regulatory framework for bond distribution — ensuring standardised disclosures and pricing transparency — would be a game-changer,” IndiaBonds.com’s Goenka told CNBC TV18.
He emphasised that regulatory uniformity between online bond platforms and traditional debt brokers could streamline accessibility and instil greater investor confidence.
Retail bond transactions soar 327%, but liquidity remains key
Retail participation in bonds has surged, driven by SEBI’s move to lower the minimum investment threshold. According to BSE data shared by IndiaBonds.com, bond transactions have jumped 327% annually. However, secondary market liquidity remains a critical challenge.
“Liquidity is one of the biggest challenges in India’s bond market,” Goenka noted. “Introducing real-time settlement mechanisms — like in equities — would make bond transactions seamless and encourage more participation.”
The surge in retail bond transactions is primarily linked to SEBI’s OBPP regulations, which came into effect in 2022. These structured the market, improved transparency, and enhanced access through technology-driven platforms.
Comparing taxation: Bonds vs equities
Goenka also called for removing the 10% TDS on listed bond coupons, arguing that it would normalise returns and make bonds a more attractive investment avenue for retail investors.
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For equities, a 10% TDS applies if annual dividend income exceeds ₹5,000, with taxation based on the investor’s slab rate. However, bonds and equities cannot be directly compared due to their inherent risk-reward differences.
Equities are growth and capital gain investments, while fixed income provides yield-based, lower volatility returns, he pointed out.
How a deeper bond market can benefit banks, NBFCs, and consumers
A thriving bond market would also benefit banks, NBFCs, and household borrowers by creating more efficient credit flows.
“Market-based financing allows banks and NBFCs to raise funds at lower costs, which translates into cheaper loans for consumers,” Goenka explained. “A deeper bond market ensures efficient credit flow, boosting financial inclusion and driving economic activity.”
While India’s bond market is at a turning point, addressing liquidity concerns, tax burdens, and distribution inefficiencies will be crucial in bridging the gap with equities and making bonds a mainstream retail investment option.
