A Quiet Budget Signal That Could Wake India’s Corporate Bond Market

Perhaps the most consequential and easily overlooked line in the Finance Minister’s Budget speech for 2026-27 was the reference to corporate bonds, long treated as the orphan of India’s rapidly expanding capital markets.

The proposal to introduce Total Return Swaps on corporate bond indices signals a potential shift in how India approaches private debt. In isolation, TRS is not transformative. What matters is the market architecture that must exist for such instruments to function at scale. If built correctly, this framework could unlock liquidity, improve price discovery and fundamentally alter the role of corporate debt as an asset class.

Fixed-income markets do not deepen merely through issuance. They require a trading ecosystem that allows risk to move, pieces to form efficiently, and capital to be recycled across ratings and maturities. Corporate bonds, traded on yield spreads, need volume. 

For this to work, India will need a system capable of supporting high-frequency trading in credit instruments under real-time supervision. That alone would represent a departure from the buy-and-hold culture that dominates the corporate debt market today.

Empirically, such a framework rests on a few critical pillars: liquidity provision for instruments rated below AA-, licensed and well-capitalised private counterparties, a functional central clearing counterparty, limited repo eligibility for high-quality corporate bonds, a centralised bond repository, and a daily updated government securities yield curve that enables ‘efficient price discovery’ for private debt.

Most of these pieces already exist. Just not together.

A Niti Aayog report on deepening India’s corporate bond market notes that the country has built these layers in fragments. The harder task is integration: bringing them into a single, coherent framework that plugs seamlessly into a fixed-income ecosystem still overwhelmingly dominated by government securities.

The Finance Minister’s reference to a market-making mechanism for corporate debt is equally important. India does have arrangers: NBFCs and brokerages that act as market makers, but depth remains shallow. Appetite is weak not just for the high-yield (junk bonds) segment, but even for securities rated below AA/AA-. This is because the Indian corporate debt market virtually offers no secondary market access for lower-rated securities, which are mostly held by mutual funds until maturity or a repurchase event.

To have a successful TRS-enabling architecture for corporate debt/securitised/hybrid index funds, the system will therefore require counter-parties that can quickly mobilise requisite resources to trade in less liquid securities, with support from either the RBI or a quasi-government funded central clearing house. At present, however, a fully functional mechanism does not exist.

Structural Gaps
If the Budget proposals are implemented in accordance with Niti Aayog’s assessment, the Indian capital market could undergo a revolutionary upgrade in the coming years. The household-to-savings cycle, aided by mutual funds, could be leveraged in this transition.

CRISIL estimates that India’s corporate debt market will cross ₹100 trillion by 2030—nearly double the current outstanding stock. With such growth prospects, Indian regulators must quickly deploy a future-ready integrated framework for corporate securities.

Before such a system can stand on its own, three priorities deserve immediate attention.

First, the RBI must ensure that commercial banks follow guidelines and utilise their High-Quality Liquid Assets Level 2B category for holding high-quality corporate debt. This is not always a given in the Indian banking space. Since the Held to Maturity on corporate debt is now allowed, such holdings will go a long way in acceptance and absorption of such debt in the banking system.

Second, the RBI must dedicate a proportion of its balance sheet to corporate debt as part of a market stabilisation mechanism. This proportion can be part of the banking balance sheet, and not the issuing balance sheet of the central bank, to avoid currency debasement.

Third, the Ministry of Finance, in consultation with the RBI and SEBI, should move towards a unified bond trading platform modelled on China’s Inter-Bank Bond Market. A common marketplace for banks, funds, and institutional investors across government, corporate and structured debt would allow liquidity to flow efficiently along the yield curve. 

Overall, the budgetary proposals are designed to build a solid base for India’s still-developing corporate debt market and the gamut of services and products that will eventually be introduced.

If regulators can align incentives, infrastructure and risk-bearing capacity, this modest Budget reference may well be remembered as the moment India’s corporate bond market found its footing.