 "'Managed investments to more than double to Rs 315 trillion by fiscal 2027'")
After clocking a compound annual growth rate (CAGR) of 9 per cent over the past five fiscal years, the Indian corporate bond market appears set for faster growth. Rating agency Crisil expects outstanding size of bond market to more than double to Rs 100-120 trillion by fiscal 2023 from Rs 43 trillion as of last fiscal.
What will drive this growth?
"The large capital expenditure (capex) in the infrastructure and corporate sectors, growing attractiveness of the infrastructure sector for bond investors and strong retail credit growth are expected to boost bond supply, rising financialisation of household savings should drive demand. Regulatory interventions are helpful, too," said Somasekhar Vemuri, Senior Director, Crisil Rating.
Capex in the infrastructure and corporate sectors is expected to be driven by decadal-high capacity utilisation, healthy corporate balance sheets and a strong economic outlook. Crisil foresees capex of Rs 110 trillion in these sectors between fiscals 2023 and 2027, 1.7 times than that in the past five fiscal years. Crisil expects this pace of capex to continue past fiscal 2027.
The corporate bond market is expected to finance a sixth of the capex foreseen
Infrastructure assets are becoming strong contenders for investment because of their improving credit risk profile, recovery prospects and long-term nature. Currently, infrastructure constitutes only ~15% of the annual corporate bond issuance by volume. But structural improvements aided by a raft of policy measures should make infrastructure bond issuances amenable to patient-capital investors — insurers and pension funds — the key investor segment in the bond market.
Retail credit growth is expected to maintain a pace supported by private consumption growth and formalisation of last-mile credit flow.
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India’s retail credit market was 30 per cent of GDP last fiscal, way smaller than that in the developed nations. Retail credit in the US, for instance, was 54 per cent of its GDP at the end of calendar year 2022. Non-banking financial companies (NBFCs) complement banks to ensure credit flow to untapped segments.
The bond market, being a key funding source for the larger NBFCs and accounting for a third of the funding mix, will play an important role in funding retail credit flow, noted Crisil.
RBI's revised risk weights for bank exposure to NBFC is advantage bonds
In addition, the revised risk weights announced by the Reserve Bank of India (RBI) for bank exposure to NBFCs5 can tilt their funding mix in favour of bonds.
"On the demand side, India is increasingly witnessing the financialisation of savings or a move away from physical assets (such as real estate and gold) to financial assets. The money getting financialised is increasingly being invested in capital market products. Among financial assets, managed investments have clocked a 16 per cent CAGR, compared with 10 per cent CAGR for bank deposits over the past five years," noted Crisil.
Managed investments to grow faster than FDs
Managed investments are expected to continue to grow faster than bank deposits because of increased digitalisation, rising investor sophistication in terms of retirement planning, higher awareness and use of insurance, investment objectives aimed to beat inflation, and a growing middle-income population, as per Crisil.
The rating agency estimates assets in the managed investment segment to double to Rs 315 trillion by fiscal 2027, and the trend is expected to continue well past fiscal 2027. These investments will be in both equity and debt and good portion of it may flow to the corporate bond market.
"The RBI and SEBI8 have already mandated large borrowers to tap the corporate bond market for incremental borrowings. The recent launch of the Corporate Debt Market Development Fund and the setting up of AMC Repo Clearing Ltd by SEBI will help in improving the secondary market liquidity for institutional investors and thereby boost investor confidence. Growth may get a leg up if the regulators address some key issues, such as relaxing the investment restrictions on corporate bonds rated below ‘AA’ for insurance and pension funds and fortifying the credit default swaps market," said Ramesh Karunakaran, Director, Crisil.