Deepening India’s Corporate Bond Market: What NITI Aayog Gets Right—and What It Still Misses

In 2019, I submitted my doctoral thesis on Factors Constraining the Development of Corporate Bond Markets in India under the guidance of Dr. Sunder Ram Korivi, Founding Dean of NISM. As part of the study, we examined the R.H. Patil Committee Report (2005) as well as the report of the H.R. Khan Committee (2016), which analysed corporate bond market development through the lens of the RBI’s 7-I Framework: Issuer, Investor, Instrument, Intermediary, Infrastructure, Innovation, and Incentives.

The thesis made a central argument: India’s corporate bond market is constrained not by the absence of reforms, but by weak institutional credibility, misaligned incentives, and incomplete market architecture. Using factor analysis, international comparison, and regulatory review, the recommendations were grouped into seven broad areas.

Key Recommendations from the Doctoral Research

1. Building a Bond Ecosystem

A well-functioning corporate bond market requires a strong foundation. This includes a deep and liquid government bond market with a reliable benchmark yield curve, effective implementation of the Insolvency and Bankruptcy Code to ensure timely default resolution, rationalisation of stamp duties and taxes, better coordination among regulators such as SEBI, RBI, IRDAI, and PFRDA, and the development of an active securitised assets market.

2. Improving Market Microstructure

Liquidity in secondary markets must be strengthened, and exchange-based trading for institutional investors encouraged to enhance transparency, price discovery, and trading volumes.

3. Broad-basing the Investor Base

Investment norms for insurance companies and pension funds should be relaxed to allow exposure to corporate bonds rated below AA. Regulatory and tax certainty for foreign portfolio investors is essential. Retail participation should be treated as complementary rather than central and channelled primarily through pooled vehicles such as mutual funds and ETFs.

4. Issuer Behaviour and Market Fragmentation

The market needs benchmark-sized, repeat issuances, re-issuance under common ISINs, and greater participation by large, highly rated corporates in bond-based fund-raising.

5. Strengthening Market Intermediaries

Brokers and primary dealers must be enabled to act as genuine market makers, supported by appropriate capital and regulatory treatment. Regulatory disincentives for banks to participate in bond trading and inventory holding should be reduced.

6. Re-inventing the Credit Rating Process

Investor confidence requires greater transparency and accountability from credit rating agencies, including performance tracking and penalties for persistent rating failures.

7. Reassessing Liquidity Enhancement Tools

Several liquidity-enhancing measures—such as repos and credit default swaps—have had limited impact. Their design must focus on usability, with legal, capital, and accounting frictions removed. Instruments alone do not create liquidity without aligned incentives.

Against this background, the recommendations of NITI Aayog’s recent report on deepening the corporate bond market merit close attention. My assessment is that the report largely gets the diagnosis right but remains insufficiently radical, particularly when evaluated through the H.R. Khan Committee’s 7-I framework.

NITI Aayog Report Through the 7-I Lens

The Diagnosis: A Bank-Dominated Financial System

(Investor & Incentives)

At its core, the NITI Aayog report correctly identifies India’s fundamental structural weakness: excessive dependence on bank credit. Corporate bonds account for barely 15–16% of GDP, compared with over 40% in the United States and more than 70% in markets such as South Korea. This imbalance had tangible consequences during India’s NPA crisis of 2016–17, when stressed bank balance sheets severely constrained credit to the broader economy.

This diagnosis mirrors the conclusions of both the R.H. Patil and H.R. Khan Committees, which highlighted excessive concentration of credit risk within the banking system. From a 7-I perspective, the issue is one of investor concentration and distorted incentives.

Where the Report Gets It Right

(Investors, Infrastructure, Incentives)

NITI Aayog deserves credit in three areas.

First, Investors: its emphasis on broadening the investor base aligns with the H.R. Khan Committee’s assessment that restrictive investment norms suppress demand beyond AAA-rated bonds.

Second, Incentives: its focus on tax distortions such as rationalising TDS, withholding tax, and introducing tax-incentivised bond products and recognises a core insight of the 7-I framework: markets respond to incentives, not exhortation.

Third, Infrastructure: improved trade reporting, unified databases, and digital access address long-standing weaknesses in transparency and price discovery.

These measures are consistent with both global experience and academic evidence. However, they address only part of the problem.

The Credit Rating Blind Spot

(Instrument & Incentives)

One of the omissions in the NITI Aayog report is its limited engagement with the credit rating ecosystem. Indian bond markets remain excessively dependent on ratings, yet confidence has been repeatedly undermined by high-profile defaults of highly rated issuers.

This is a central constraint under the 7-I framework. Without credible credit differentiation, the market cannot move beyond AAA and AA paper. While the report speaks of better risk assessment, it avoids confronting deeper issues such as issuer-pays conflicts, rating inflation, weak accountability, and regulatory over-reliance on ratings. Liquidity follows trust, not regulation.

Retail Investors: Necessary but Overstated

(Investor)

While NITI Aayog places considerable emphasis on retail participation, global experience and the H.R. Khan Committee’s own analysis shows that deep bond markets remain institutionally driven. Retail participation typically occurs through intermediated vehicles such as mutual funds, ETFs, and pension products, not through direct bond ownership.

Overemphasising retail participation risks diverting attention from the more difficult task of unlocking institutional risk appetite.

Liquidity Tools That Do Not Bite

(Instrument & Intermediary)

Market making, repos, and credit default swaps featured prominently in earlier reform efforts and reappear in the NITI Aayog report. Yet their impact remains negligible. Brokers lack balance sheets, banks face regulatory disincentives, and capital and legal constraints continue to inhibit usage.

Reiterating these tools without addressing intermediary economics risks repeating past failures identified under the 7-I framework.

Issuers: The Missing Half

(Issuer)

Issuer behaviour remains one of the least addressed constraints. Frequent small issuances, dominance of private placements, and lack of re-issuance under common ISINs fragment liquidity.

While NITI Aayog acknowledges these issues, it stops short of proposing strong issuer-side nudges such as incentives or mandates for benchmark-sized issuances. Infrastructure alone cannot correct issuer behaviour.

The Political Economy Question

(Intermediary & Incentives)

Few policy documents confront the political economy of financial intermediation. Banks are powerful incumbents. A deep bond market introduces competition, compresses spreads, and reallocates credit risk.

In several Asian economies with developed bond markets, banks act as market makers. Evidence from India suggests the opposite. Ignoring this reality risks underestimating implementation challenges.

Historical Comparison Box: How Different Is NITI Aayog?

R.H. Patil Committee (2005):
Focused on basic market creation—issuance norms, disclosure, and clearing infrastructure.

H.R. Khan Committee (2016):
Introduced the 7-I framework, recognising that bond market development is a system-wide challenge involving issuers, investors, intermediaries, and incentives.

NITI Aayog (2024/25):
Reaffirms the diagnosis and strengthens focus on investors, infrastructure, and incentives—but remains cautious on issuers, intermediaries, and credit rating reform.

Bottom line: The framework has evolved, but execution remains incremental.

The Way Forward

NITI Aayog’s report is a necessary step, but not a sufficient one. It aligns well with parts of the H.R. Khan Committee’s 7-I framework, particularly on Investors, Infrastructure, and Incentives, but remains cautious on Issuers, Intermediaries, and Instruments.

India no longer lacks diagnosis or frameworks. What it lacks is decisive implementation that confronts entrenched incentives. Deep bond markets are not built by consensus alone. They are built by confronting uncomfortable constraints and removing them.

Disclaimer:

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About the Author:

Shagun is a Doctorate, CA and a CFA with over 20 years of experience in the investment industry. She was recognised as one of India’s Top 100 Women in Finance by AIWMI in 2019. Shagun started her career as part of a buy-side fixed income team at a leading insurance company, working in various capacities including credit analyst and fund manager. After 7 years, she moved to the education industry with a keen interest in bringing real-world and application based learning to the classroom. She  teaches subjects like Financial Markets, Financial Accounting, Fixed Income and Wealth Management. While continuing as an Adjunct Faculty, she moved on to an entrepreneurial role of a wealth manager managing investments for retail and HNI clients. She also conducts sessions and workshops on financial awareness for individuals. Having a passion for bond markets, she completed a Ph.D in Corporate Bond Markets in India in 2020 and has published several research papers and case studies in both national and international journals.