CRISIL Yearbook Indian debt market 2021

Overall supply of corporate bonds could double to Rs 65-70 lakh crore

Over the next five fiscals, corporate bond issuances outstanding could more than double from ~Rs 33 lakh crore or 16% of gross domestic prod- uct (GDP) at the end of fiscal 2020 to Rs 65-70 lakh crore – tantamount to 22-24% of GDP – by the end of fiscal 2025. This growth will have three drivers: investments, primarily for infrastruc- ture; non-banking financial companies (NBFCs) and housing finance companies (HFCs); and innovation to facilitate enhanced bond market funding for the NIP.

Infrastructure sector to supply Rs 5.5-7.5 lakh crore of bonds

The NIP has set an ambitious target of achieving Rs 111 lakh crore of investments in the infrastructure sector over fiscals 2020 through 2025. That is more than twice the infrastructure investments of ~ Rs 51 lakh crore seen between fiscals 2014 and 2019. As much as 71% of the investments envisaged in the NIP is in four sectors – energy (predominantly power, renewables), roads, railways, and urban infrastructure.

Bulk of the investments in infrastructure are expected to be borne by the central and state governments directly through budget allocations, followed by NBFCs – mostly government owned ones such as Power Finance Corporation, Rural Electrification Corporation and Indian Railway Finance Corporation – with the corporate bond market expected to play a relatively muted role.

Our growth projection, based on the existing policy framework and optimistic assumption, suggests demand for corporate bonds will likely touch Rs 54-58 lakh crore by fiscal 2025. Given India’s requirement of capital through the bond market over the next few years, key policy mea- sures are needed for boost demand further. We believe focused policy measures can benefit the following investor segments, and thereby push aggregate demand to Rs 60-65 lakh crore.

  • Mutual funds (MFs): Aligning capital gains taxation for debt MFs on a par with equity; extending tax sops similar to equity linked savings scheme (ELSS) to debt funds; targeted tax exemptions; and mea- sures such as setting up of an institution for supporting liquidity of investment grade corporate bonds can increase flow to debt funds
  • Retail investors: Incentivising retail investment through tax sops, similar to the one for infrastructure bonds introduced over fiscals 2010-12, can help garner a large pool of capital
  • Employees’ Provident Fund Organisation (EPFO): Measures such as credit default swaps and credit guarantees can encourage invest- ment in private sector bonds
  • Foreign portfolio investors (FPIs): To ensure full utilisation of limits for FPIs, taxation changes such as easing of withholding tax, offering tax incentives, setting up institutions to support liquidity and hedge credit risk, and inclusion in global indices can help significantly

NIP financing hinges a lot on innovation

While the NIP envisages infrastructure investments of Rs 111 lakh crore over fiscals 2020 to 2025, it acknowledges the likelihood of a 8-10% shortfall. Moreover, the weaker fiscal position of the Centre and states after the pandemic does not augur well for infrastructure spending. That’s why it’s imperative to leverage alternate and innovative financing avenues for the great Indian build-out.

The essentiality of innovation

India’s corporate bond market can play a significant role in facilitating takeout financing for operational infrastructure projects, and help release a material portion of the over Rs 20 lakh crore lent by banks and NBFCs to finance under-construction projects (for more perspectives on this, see the chapter titled ‘Operational HAM roads bond well’).There is also substantial asset-monetisation potential in the infrastructure sector, which would, in turn, offer opportunities for the corporate bond market to facilitate debt financing for monetised assets.

For e.g., public sector undertakings in infrastructure currently hold assets worth over Rs 20 lakh crore. New projects worth Rs 10-12 lakh crore are also expected to be implemented by the public and private sectors over the next two fiscals in relatively stable asset classes such as roads, power generation and transmission, renewables, oil and gas pipelines, and telecom, which would become operational and stabilise within the next five fiscals. This reflects huge asset-monetisationpotential over the medium term.However, for bond market investments to reach these operational infrastructure assets, issuances by these assets need to be aligned with the requirements of bond investors who typically invest only in highly rated instruments. That means innovations such as pooling of assets, a well-capitalised Credit Guarantee Enhancement Corporation, and CRISIL INFRA EL rating scale are essential.

Pooling of assets can attract takeout financing from the corporate bond market, based on the structural credit enhancement provided by diver- sification across different counterparties and geographies that reduces idiosyncratic risks.The scale and diversification of pooled assets can also help attract for- eign capital into infrastructure. Additionally, pooling of assets brings in professional managements with asset-class-specific expertise that can improve operational performance and optimise capital structure, and provide comfort to investors.

InvITs are gaining currency in India following the footsteps of the developed world. The combined AUM of InvITs and real estate investment trusts (REITs) have reached ~Rs 2 lakh crore, marking a whopping 42% CAGR since the launch of the first InvIT in fiscal 2018.Such growth has been enabled by supporting regulations such as cap on leverage, and restriction on investments in under-construction assets. The AAA rating threshold is also stipulated for listed InvITs if their debt- to-AUM ratio exceeds 49%. Further, mandatory distribution of surplus cash enhances investor confidence. These attributes can attract bond market investments into InvITs.

InvITs can help create an ecosystem for infrastructure creation by

allowing developers to offload operational assets and release capital for new projects, and by allowing project financiers to offload debt to a new set of investors and unlock funds.InvITs have the potential to generate ~Rs 6.5 lakh crore over the medium term, which can be part-funded by bond market issuances of Rs 3-4 lakh crore in sectors such as roads, transmission, gas pipelines, telecom infra and renewable assets.

Macroeconomic troubles Even before the pandemic hit, real GDP growth had slumped to a decadal low of 4% in fiscal 2020 compared with 6.5% the previous year. This was driven by slowing private consumption as well as investment growth. Business and consumer confidence were at their lowest in 10 years, and the financial sector, burdened with bad assets, was unable to adequately lubricate the economy.The pandemic sharply slowed the Indian economy to -23.9% in the first quarter this fiscal. The huge economic cost it extracted forced the country to open up and get back on its feet in the following quarter, slowing the decline to -7.5%. What also helped was a sharp cutback in operating costs for corporates due to jobs and salaries being pared, employees exercising work-from-home options, and low input costs due to benign interest rates and prices of crude oil and commodities. Two other factors have been supportive: the agriculture sector, which recorded 3.4% growth on-year, and exports, which only posted a contraction of 1.5% versus -19.8% in the first quarter. Since imports fell much sharper than exports, net trade was less of a drag on the economy compared with the past. For the first half of this fiscal overall, GDP declined 15.7%, with the services sector suffering more than manufacturing. In the second half, GDP growth is estimated to be almost stagnant. Thus, for the fiscal overall, GDP is expected to decline 7.7%, according to first advance estimates by the National Statistics Office. Consumer price index-linked (CPI) inflation remained within the RBI’s target of 4-6% for much of fiscal 2020, averaging 4.8% for the year. However, in the first half of this fiscal, it consistently remained above the upper target limit, averaging 6.7%. Sporadic lockdowns and supply disruptions, coupled with high bullion prices, have kept prices elevated despite slack demand. The weak domestic demand, coupled with low crude prices, led the current account deficit to narrow to 0.9% of GDP in fiscal 2020 compared with 2.1% the previous year. The imposition of lockdowns led the current account to turn surplus in the first half of this fiscal, as imports fell much sharper than exports. The first quarter saw a record-high surplus of $19.8 billion, or 3.9% of GDP. With the economy unlocking, this moderated to $15.5 billion or 2.4% of GDP in the second quarter. Uncertainty post the pandemic in March 2020 led to a record outflow by FPIs and a sharp depreciation of the rupee against the US dollar at fiscal 2020-end. The rupee averaged 74.4 to the dollar in March 2020, compared with 69.5 in March 2019. However, the sharp easing of monetary policies by central banks globally led to a return of FPI inflows. This, coupled with the current account surplus, eased depreciation pressure on the rupee. By the end the first half of this fiscal (September average), the rupee settled at 74.7 per US dollar. The central government’s fiscal deficit had breached the Fiscal Responsibility and Budget Management (FRBM) target in fiscal 2020, with fiscal deficit printing at 4.6% of GDP. Gross market borrowing had risen to Rs 7.1 lakh crore in fiscal 2020 compared with Rs 5.7 lakh crore the previous year. The hit to economic activity due to the pandemic further affected tax revenues and led to a sharp rise in borrowing. In the first half of this fiscal, the Centre’s gross market borrowing had surged to Rs 7.4 lakh crore.

Corporate bond issuances stick to ‘private’ road

Primary issuance via private placements continued to dominate the total issuance – at ~98% in fiscal 2020 and 99.77% in the first half of fiscal 2021. Public issuance (largely driven by retail investors) lagged behind because of reduced interest rates, positive equity markets, and alternative cheaper fund-raising options for NBFCs, which typically borrow through public placements. A multitude of schemes launched by the Reserve Bank of India (RBI) and the Ministry of Finance, such as long-term repo operations (LTRO), targeted long-term repo operations (TLTRO), special liquidity scheme (SLS), and partial credit guarantee scheme (PCGS), brought low interest rates and high liquidity to the market. Hence, despite the Covid-19 pandemic, primary issuance was ample.

The number of NBFC and HFC issuers who approached the bond market has fallen post fiscal 2018 due to lower appetite for such papers, reduced capital requirement (owing to consolidation of business at top NBFCs and HFCs), and alternative funding sources (such as securitisation and bank loans). The total issuance fell a marginal ~3% on-year in fiscal 2019, following the IL&FS and NBFC liquidity crisis. Meanwhile, the number of issuers decreased a significant ~18% on-year, reflecting the strain on lower-rated issuers in raising capital from the market. In fiscal 2020, the total issuance amount increased a marginal ~6% on-year, the number of issuances fell ~12% on-year, and the number of issuers changed a minimal ~3% on-year. As interest rates fell, the average issuance size increased in fiscal 2020 and also the first half of this fiscal.


Indian Indices topped the chart in both govern- ment and corporate bond fund categories, out- performing all of its Asian peers in local return terms (domestic investor perspective). CRISIL Composite Bond Fund Index has seen rapid growth in the past 10 years, surpassing S&P Philippines Index in July 2016 and S&P Indonesia Index in September 2018. CRISIL Dynamic Gilt Index outperformed the S&P Indonesia Government Bond Index in May 2018, and has been leading its peers since then.

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