India Corporate Bond Market: Growth, Gaps & Roadblocks

India’s corporate bond market has grown tremendously over the last decade, attracting attention from policymakers, financial platforms, and large institutional investors. As of March 2025, the market stands at over ₹53.6 trillion (US$642 billion), a significant leap from just a few years ago. However, despite this impressive size, the market still remains underutilized, illiquid, and largely inaccessible to retail investors.

So why hasn’t India’s corporate bond market become a mainstream asset class like equities or mutual funds? What’s holding back liquidity, and why is the retail investor missing from this picture? Experts believe the answer lies in a mix of structural inefficiencies, fragmented infrastructure, and a regulatory landscape that has been slow to evolve.

This blog explores the current state of the India corporate bond market, identifies key gaps, and analyzes what needs to change to unlock its full potential.

Table of Contents

Market Size vs Market Maturity: A Tale of Two Realities

India’s corporate bond market has certainly grown in terms of size. According to Jessica Shah, Quantitative Research Analyst at 1 Finance, as of March 2025, “India’s corporate bond market stood at ₹53.6 trillion. While it has grown meaningfully in recent years, it remains underdeveloped relative to global benchmarks, accounting for just 16–18% of India’s GDP, compared to over 40% in many advanced economies (e.g., China: 36%, South Korea: 80%).”

Vishal Goenka, Co-founder of IndiaBonds.com, echoes this concern, noting that while the corporate bond market represents 22.4% of the public bond market, it still lags in terms of depth and participation. “The structure is fragmented. Bonds can be traded across three different exchange segments—capital markets, OTC, and request-for-quote (RFQ). Liquidity gets divided and price discovery suffers,” he explains.

However, not all experts agree on the underdevelopment narrative. Puneet Pal, Head of Fixed Income at PGIM India Asset Management, offers a more balanced view: “The corporate bond market is large, with over ₹50 lakh crore in outstanding bonds. Structurally, it has evolved to offer different instruments and tenures. But yes, liquidity is still a major challenge, especially for lower-rated issuers.”

So while the India corporate bond market looks mature on paper, its operational limitations keep it from functioning like those in developed economies.

The Liquidity Puzzle: Big Numbers, Little Action

Despite its size, India’s corporate bond market remains illiquid. Daily trading volumes in corporate bonds range between ₹8,000–10,000 crore, a far cry from the ₹50,000–70,000 crore traded daily in government securities (G-secs).

This discrepancy is largely due to the OTC nature of corporate bond trades, unlike the screen-based and standardized format of G-secs. As Puneet Pal points out, “The lack of screen-based trading hinders price discovery, especially in lower-rated bonds. Investors prefer safety and predictability, which the current system does not offer.”

Jessica Shah adds that the market is “opaque and dominated by AAA-rated issuers and large institutions. The absence of consistent liquidity makes it difficult for investors to exit when needed.”

Vishal Goenka proposes a practical solution: “Liquidity needs to be pooled. Today, we have separate trading systems for RFQ, OTC, and exchanges. We must unify these platforms to create a single, transparent market. A fragmented venue weakens depth and trust.”

Until this structural overhaul happens, secondary market liquidity will remain the biggest bottleneck in the corporate bond market’s evolution.

Retail Participation: Where Are the Individual Investors?

Perhaps the most glaring gap in the India corporate bond market is the abysmally low retail participation, which remains under 4% by some estimates.

Why does the average investor avoid corporate bonds?

a) Awareness and Complexity

“Retail investors don’t fully understand the risk-return tradeoff,” says Jessica Shah. “Corporate bonds are often perceived as safer than equities but come with credit risks, delays, and default handling issues. Many are issued via private placements and not available on public platforms.”

b) Access Barriers

Vishal Goenka highlights how complex and outdated the bond selling process still is. “Selling corporate bonds requires filling a Delivery Instruction Slip (DIS), which involves physical paperwork, signatures, and waiting days for execution. This is completely at odds with how easy it is to sell equity or mutual fund units today.”

c) Lack of Regulated Distribution

According to Goenka, the absence of a uniform code for bond distributors is another major hurdle. “Offline brokers often follow different rules than online platforms. This inconsistency makes the market opaque and unregulated, limiting trust and growth.”

d) Taxation and Exit Friction

Puneet Pal points out that taxation is another issue: “Interest income on corporate bonds is taxed at the marginal rate, and capital gains aren’t as favorable as those in equity. This makes mutual funds a more tax-efficient option for debt exposure.”

Despite regulatory attempts to improve access through fintech platforms and RBI frameworks like RBI Retail Direct, the friction points—both in knowledge and infrastructure—remain too high for most retail investors.

Fragmentation: A Structural Weakness

Unlike the equity market, where liquidity is concentrated on two major exchanges, the India corporate bond market is divided across:

Capital market segment (exchanges)
Request for Quote (RFQ) system
Over-the-counter (OTC) markets

This fragmentation not only splits volumes but also creates inconsistent pricing, disclosures, and execution norms. According to Goenka, “Without a unified platform, you can’t build real trust or volume in a market. Everyone—issuers, investors, regulators—needs to converge on a single digital ecosystem.”

Some progress has been made via initiatives like CBRICS (Corporate Bond Reporting and Integrated Clearing System) and SEBI’s emphasis on electronic platforms, but adoption remains patchy.

What Will Drive the Next Phase of Growth?

For the India corporate bond market to become a credible third pillar of capital markets (alongside equities and mutual funds), the following key reforms are essential:

a) Unified Digital Infrastructure

A single, real-time, screen-based trading platform that integrates RFQ, OTC, and exchange transactions will enable price discovery, improve transparency, and attract wider participation.

b) Retail Education & Simpler Access

Mass awareness campaigns, integration with existing brokerage apps, and easy “click-to-buy/sell” infrastructure will be crucial. Just like UPI transformed payments, corporate bonds need a UPI-like moment.

c) Distribution Regulation

Much like AMFI for mutual funds, India needs a regulated, licensed ecosystem of debt distributors with standard practices, transparent commissions, and investor-first processes.

d) Tax and Product Innovations

Reconsidering tax treatment, especially on interest income, could improve retail appeal. Moreover, hybrid bond products, SIPs in bonds, and bond ETFs can ease access for smaller investors.

e) Issuer Incentives & Rating Diversification

Encouraging mid-size companies and NBFCs to raise capital via bonds (instead of bank loans) will broaden the issuer base. This will also bring better ratings diversification beyond AAA.

Conclusion: A Market with Scale, But Not Yet Trust

India’s corporate bond market has the scale and the institutional appetite, but it lacks trust, liquidity, and ease of use—especially for retail investors.

As experts point out, without deep secondary market trading, simplified exit mechanisms, and standardized distribution, retail investors will continue to view bonds as inaccessible and risky.

But the potential is immense. India has a growing investor base, robust financial digitization, and a policy environment supportive of market reforms. With the right mix of technology, regulation, and education, the India corporate bond market can become a powerful and inclusive investment avenue.

Now is the time to bridge the gap between potential and participation.