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India’s Booming Corporate Bond Market Growth Prospects and Investor Impact

Should you use your intuition as an investor? | Scripbox

Introduction

CRISIL estimates India’s corporate bond market size to more than double from Rs 43 lakh crore currently to Rs 100-120 lakh crore by FY30, led by infrastructure spending and financialization of savings.

Analysis for Layman

Corporate Bonds

Debt instruments issued by companies to raise funds from investors promising to repay over time with interest.

CRISIL

Credit rating agency providing insight into corporate debt finances.

AMC Repo

Tool allowing corporates to borrow against bond collateral to meet short-term needs.

Sebi

Securities market regulator.

CRISIL sees strong tailwinds for corporate bonds with infrastructure sectors requiring massive capital expenditure and retail investors allocating a higher share of savings to financial assets rather than gold/real estate. Recent government backstop facility, upcoming Development Finance Institution funding, along with regulatory moves on easing investment guidelines, strengthening risk management frameworks, will also hasten growth.

Original Analysis

CRISIL’s robust near 3x growth estimate for India’s corporate bond market stems from twin engines firing in sync – supply of quality bond issuances scaling up on the back of infrastructure buildout while demand set to surge given financialization of household savings. Combination of fiscal constraints limiting sovereign debt capacity, public-private partnership models coming to the fore, and sunrise sectors like renewables marching ahead necessitate sizeable private capital allocation to infrastructure asset creation. While alternate channels like loans, private equity will retain relevance, intersection of long tenures and scale make corporate bonds ideal. On the demand side, stagnant real estate, gold underperformance coupled with financial literacy gains to result in higher retail flows into debt/equity products. Success however hinges on easing regulatory rigidities for insurers, pension funds to invest in lower than AAA corporates and nurturing vibrant secondary market enabling exit liquidity.

Impact for Retail Investors

For retail investors, quantum growth in corporate bond market size signifies manifold expansion of another stable fixed income asset class to balance their portfolio risks beyond traditional options like bank FDs, small savings schemes, etc. Exposure to reputed company bonds across maturities can allow better returns especially in a low-interest rate environment. However, lack of transparency on secondary market pricing and low liquidity remains key challenges. Investors must assess portfolio concentration risk, stay away from speculative high yield bets, and build adequate emergency reserves in liquid assets first before allocating to these bonds. Overall, regulatory efforts on improving ease of access through streamlining investment channels and reporting norms will support wider participation.

Impact on Industries

Infrastructure

Capex plans to gain easier access to cost-efficient debt from deeper corporate bond market.

Banking

Loan market share may face some erosion with more companies tapping direct public bond issues.

NBFCs

Can leverage parent group company balance sheets for investor comfort instead of relying on bank funding alone.

Insurers, Mutual Funds

Widened corporate bond investment scope allows portfolio diversification.

Long Term Benefits and Negatives

Benefits

  • Market discipline enforced on corporates to manage leverage and cashflows prudently to retain issuer credibility.
  • Economy less susceptible to banking crises with diversified financing channels.

Negatives

  • Information asymmetry may persist on secondary market trading given fragmented liquidity.
  • Retail investors more vulnerable to periodic credit shocks or inflation risks.

Short Term Benefits and Negatives

Benefits

  • Capex revival spurs job creation across manufacturing, construction ecosystem.
  • Retail investor exposure expands investment product range.

Negatives

  • Rising cost of capital for lower-rated bonds as monetary tightening impacts risk appetite.
  • Investor confidence dents if credit shocks like IL&FS repeat.

Companies to Gain

  • L&T: Major infrastructure firm well placed to tap cheaper debt for project viability.
  • Infosys: India’s IT bellwether can further optimize working capital needs.
  • Reliance Capital: Financial services firm able to leverage group strengths for fundraising.

Companies at Risk

  • Tata Motors: Struggling auto firm already laden with excessive debt may see a higher financing burden.
  • Vodafone Idea: Tepid investor appetite for telecom SOE segment hampers fundraising scope.

Conclusion

Sustained policy commitment from RBI and SEBI on easing corporate bond market access norms, improving liquidity, and risk transparency will be imperative to unlock the estimated growth potential across retail and institutional segments.

Cited Article:

ET Bureau. “India‚Äôs Corp Bond Market Set to Cross Rs100 L-cr by FY30: Crisil.” The Economic Times

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