MUMBAI – Growth of government bond market has had a positive influence on the development of Indian corporate bond market, DRG study published on website of Reserve Bank of India today said.

However, financing of India’s deficit spending as reflected in domestic credit extended by banking sector has exerted a negative effect on development of corporate bond market, the study said.

One reason for negative impact of domestic credit provided by banking system in corporate bond market in countries such as India may be because banks are required to finance government budget deficit by holding government securities, the study opined.

The study titled “A Study of Corporate Bond Market in India: Theoretical and Policy Implications” is co-authored by Sunder Raghavan, professor of finance, Embry-Riddle Aeronautical University and three RBI officials. Main objective of the study was to trace reforms that have been put in place during last decade in corporate bond market in India and consequent developments.

The study has also analysed experience of other emerging and developing economies at similar stage of development, such as Japan, Korea, Singapore, Malaysia and Brazil, to capture factors in relation to development of Indian corporate bond market.

Even though process of reforms in Indian corporate bond market has been encouraging, implementation of reforms has proceeded slowly, it said.

“Companies continue to finance their investments through private placements and bank loans rather than through public issues and corporate bonds despite policies implemented to encourage retail and institutional participation, to streamline the issuance process and to create new and missing markets,” the study said.

Study said factors such as size of economy, openness of economy, size of stock market and other factors such as corruption have had little or no impact on development of India’s corporate bond market. Study said Indian companies tend to depend more on external sources rather than on internal sources for funding and among external sources, bank loans seem to dominate borrowings for these companies.

“One of the reasons for the bank finance being preferred by corporations is due to the prevalence of cash credit system in banks in which the cash management of the corporations is actually done by the banks. This indicates that the corporate bond market still has a long way to go before becoming a viable source for companies to finance their investments,” it added. Study has also highlighted the lack of sufficient participation from retail investors in corporate bond market despite reforms including reducing size of trading lots and recent increase in foreign investor’s limits in corporate bonds and also said India needs to explore innovative ways to attract retail investors.

“There is scope for further improvements in certain areas, such as, rationalising the stamp duty structure across the country and fixing stamp duties based on tenor and issuance value to encourage public offerings of corporate debt,” it said.

RBI study says India’s gilt mkt growth has helped corporate bond mkt

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