The Indian corporate bond market, despite having a compound annual growth rate (CAGR) of 9% in the last five years, is expected to undergo accelerated expansion.
On Monday, Crisil Ratings predicted that the bond market's size will surpass ₹ 43 lakh crore from the last fiscal year, reaching ₹100-120 lakh crore by fiscal year 2030.
According to Somasekhar Vemuri, senior director at CRISIL Ratings, The anticipated growth in the Indian corporate bond market will be propelled by a combination of factors including substantial capital expenditure (capex) in the infrastructure and corporate sectors, increased appeal of the infrastructure sector for bond investors, and growth in retail credit contributing to an enhanced bond supply. Simultaneously, the increasing trend in the financialization of household savings is anticipated to augment demand, with regulatory interventions providing support.
The increase in infrastructure and corporate sector capital expenditure (capex) is expected to be a contribution of many factors such as decade-high capacity utilisation, favourable corporate balance sheets, and a positive economic outlook, as per Somasekhar Vemuri from Crisil.
Crisil anticipates a capex of approximately Rs 110 lakh crore in these sectors from FY 2023 to 2027, surpassing the previous five fiscal periods by 1.7 times. CRISIL Ratings foresees this capex momentum sustaining beyond fiscal year 2027, with the corporate bond market projected to fund about one-sixth of the anticipated capex.
Infrastructure assets are emerging as attractive investment options due to their enhanced credit risk profile, optimistic recovery outlook, and long-term characteristics. Presently, infrastructure represents merely 15 percent of the yearly corporate bond issuance by volume, as per the statement.
Yet, it is anticipated that structural enhancements, facilitated by a series of policy measures, are expected to make infrastructure bond issuances more attractive to patient-capital investors, for insurers and pension funds, constituting a key investor segment in the bond market.
Crisil anticipates a doubling of assets in the managed investment segment to reach approximately Rs 315 lakh crore by fiscal year 2027, with this upward trajectory expected to extend beyond that period. These investments, encompassing both equity and debt, are likely to find their way into the corporate bond market.
The agency highlights that retail credit growth is anticipated to sustain its momentum, supported by the growth in private consumption and the formalization of last-mile credit flow. India's retail credit market constituted approximately 30% of GDP in the last fiscal year, significantly smaller than that in developed nations. In comparison, the retail credit in the United States, for instance, was around 54% of its GDP at the end of the calendar year 2022.
Non-banking financial companies (NBFCs) collaborate with banks to ensure credit flow to untapped segments.Given its significance as a critical funding source for larger Non-Banking Financial Companies (NBFCs) and contributing a third to the funding mix, the bond market will play a crucial role in financing the flow of retail credit.
Managed investments are projected to maintain a growth pace surpassing that of bank deposits. This trend is driven by factors such as increased digitization, a higher level of investor sophistication in retirement planning, greater awareness and utilization of insurance, investment goals focused on outpacing inflation, and the expanding middle-income population.
According to CRISIL, the recently announced revised risk weights by the Reserve Bank of India (RBI) for bank exposure to NBFCs have the potential to shift their funding composition in favour of bonds.
This shift coincides with India experiencing a growing trend of financialization of savings, where there is a shift from physical assets like real estate and gold to financial assets. The funds undergoing financialization are increasingly being directed towards investment in capital market products.
Ramesh Karunakaran, director at CRISIL Ratings, mentions that the RBI and SEBI have already mandated significant borrowers to utilise the corporate bond market for additional borrowings. The recent introduction of the Corporate Debt Market Development Fund and the establishment of AMC Repo Clearing Ltd by SEBI are expected to enhance secondary market liquidity for institutional investors, ultimately bolstering investor confidence.
(Inputs from other agencies)
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