India's corporate bond market is growing in size but shrinking in new business. Outstanding stock has tripled, yet fresh issuance fell 36% year-on-year to ₹1.88 lakh crore in the April-June quarter. Over the same period, registrations for external commercial borrowings rose 60% to $14.6 billion. The direction is clear: prime Indian borrowers are increasingly looking overseas for funds.
The shift is a direct result of domestic interest rates. After the RBI's 25 basis point repo rate hike in October, AAA-rated corporates raised domestic bonds at coupons between 8.13% and 8.85%. For many, this is less attractive than cheaper foreign currency loans available through ECBs. Companies like REC, SIDBI, and Flipkart Internet have recently sought or raised billions via the ECB route, diverting what would have been large-ticket domestic bond issuances.
A changing risk mix
The exit of top-rated issuers is altering the market's composition. The share of AAA-rated papers in the corporate bond market has declined to approximately 66% in the current fiscal year up to September, down from 75% in the previous two financial years. Simultaneously, the shares of AA-rated and below-AA-rated bonds have risen to roughly 22% and 12%, respectively.
For fixed-income investors and credit analysts, this marks a structural shift. The domestic corporate bond market is becoming more reliant on lower-rated borrowers, which changes its aggregate risk profile and liquidity. While SEBI is consulting on measures to deepen the market, including expanding online bond platforms, the immediate effect is a concentration of credit risk. The market's growth is now being driven by its stock, not its flow, as its highest-quality participants find better value elsewhere.