T Rabi Sankar: Corporate bond markets in India – challenges and prospects

Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the Bombay Chamber of Commerce & Industry, Mumbai, 24 August 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

1. An active corporate bond market serves multiple functions. Apart from providing borrowers an alternative to bank finance, corporate bonds can lower the cost of long- term funding. Banks are typically constrained in lending long-term because their liabilities are relatively of a shorter tenor. An efficient corporate bond market with lower costs and quicker issuing time can offer an efficient and cost-effective source of longer term funds for corporates. At the same time, it can also provide institutional investors such as insurance companies and provident and pension funds with long-term financial assets ("preferred habitat"), helping them match the durations of their assets and liabilities.

2. From a macro-financial or financial stability perspective, a well-developed corporate bond market serves to spread risks away from the banking system. Banks are key to financial stability, as they provide liquidity services, credit and payment systems to the economy, and it is important to regulate their risk-taking activities. A market-based source of finance, such as corporate bond market, therefore, is more effective in dissipating risk across a much wider category of investors, thereby contributing to overall financial stability. A reasonably developed corporate bond market can play the role of the "spare tyre2", mitigating financial shocks and preserving financial stability.

3. It is against this background that the Government, SEBI and the Reserve Bank have been taking concerted efforts to facilitate the development of the corporate bond market in India. I thought I would use this opportunity to dwell upon the various aspects related to the development of this market, the journey so far, the challenges which have been encountered and share some thoughts on the potential way forward.