‘India needs to further develop corporate bond markets’

The development of corporate bonds has "not been too satisfactory", Reserve Bank of India Deputy Governor R. Gandhi said on Monday, calling the huge supply of government bonds one of the impediments.

Speaking at a debt market summit in Mumbai, Gandhi also called for a "reassessment" of the role played by pension funds and insurance companies in corporate bond markets. Both categories of investors face limitations in investing in corporate debt.

“The huge supply of government paper in the country is one of the major impediments to the growth of corporate bond market,” Gandhi said, addressing a corporate debt event organised by Care Ratings here.

"The progress in the growth of corporate debt segment has not been too satisfactory for our liking," Gandhi said.

Presenting data which showed the inability of the corporate debt market to grow, Gandhi said every year, the government borrowing only grows “unabated“.

If we compare with government bond market, the corporate bond market is dwarfed,” he said, adding that as a percentage of GDP, the outstanding government bonds were at 49.1 per cent while corporate bonds were at 5.4 per cent, in 2013.

Gandhi also called for corporate bond market infrastructure to be brought at par with that of the government bonds market, saying it would improve liquidity and enhance transparency.

Gandhi also said allowing re-issuance of corporate bonds can help in market development, but warned that companies should ensure that does not lead to redemption pressures.

Corporate bonds are regulated by capital markets regulator Securities and Exchange Board of India (SEBI).

To review foreign investments in corp bonds

India has been monitoring foreign inflows into corporate bonds and will review investment limits for overseas institutional funds once their investment quota is exhausted, Gandhi said.

Also read: SEBI ready to raise foreign portfolio investment cap on corporate bonds

Overseas demand for corporate bonds has surged since the quota for government bonds was exhausted last year, with three-fourths of the $51 billion foreign investment limit on corporate bonds already utilised.

Gandhi added the central bank has to tread a fine balance in terms of the foreign holdings of Indian bonds given the need to be mindful about the country's external debt.

“We are very cautious of the trade-off that we need to keep in mind while permitting foreign flows into the debt segment,” Gandhi said today.

“Therefore, consistently we have been monitoring the level of flows coming into this (corporate bond) segment.”