Budget Signals Fresh Push to Deepen India’s Underdeveloped Corporate Bond Market

• Budget proposes FEMA rule changes and total return swaps to improve liquidity in India’s underdeveloped corporate bond market.

• Market participants welcome the move but await RBI clarity on regulatory and operational details.

• Policy aligns with Economic Survey goals to deepen capital markets and support long-term growth.

In light of a proposed market-making framework, Union Finance Minister Nirmala Sitharaman announced a review of the Foreign Exchange Management Act (FEMA) rules. Sitharaman also proposed the introduction of total return swaps (TRS) on corporate bonds in her Union Budget speech on Sunday. She said the move is aimed at attracting foreign capital in line with India’s evolving economic priorities and strengthening domestic financial markets.

India’s corporate bond market remains underdeveloped compared to its equity market.

“TRS is used by FPIs (foreign portfolio investors) and is a very popular product. Since corporate bonds carry higher coupons, it will certainly make more sense for FPIs, but we have to look into the regulatory aspects,” said Alok Singh, Group Head – Treasury at CSB Bank. “It will take time to evolve in the domestic market; TRS is not well developed even otherwise.”

The initiative aims to improve access to funding and enable derivatives based on corporate bond indices, which are expected to deepen liquidity and trading activity in the market. TRS is a derivative instrument that allows investors to receive the economic return of an asset without owning the underlying security, which is held by a bank or intermediary. The bank or intermediary passes on the return in exchange for a funding cost and margin.

However, market participants said clarity on operational and regulatory details is awaited to better assess the scale and impact of the proposal. “The market is awaiting draft rules from the RBI (Reserve Bank of India) to assess the proposal. In a broader sense, the move can also be viewed in the context of fiscal deficit targets and India’s structural effort to position itself better globally and improve its credit ratings,” said a senior private bank official, who requested anonymity.

In 2025, three global rating agencies revised India’s sovereign outlook or ratings upward, with Morningstar DBRS and S&P Global Ratings upgrading India to BBB from BBB (low) and BBB-, respectively, while Rating and Investment Information Inc. (R&I) raised India’s rating to BBB+ from BBB.

The policy announcement also aligns with recommendations in the Economic Survey 2025–26, which emphasised the need to develop financial markets to finance India’s long-term growth ambitions under Viksit Bharat 2047.

“To finance sustained growth, India must strengthen long-term capital markets. Corporate bond markets remain shallow and illiquid, dominated by top-rated issuers. Securitisation is limited, municipal bonds are underdeveloped, and pension and insurance funds remain conservative investors due to regulatory and cultural inertia,” the survey said.

The Budget also announced incentives for municipal bond issuances, a move expected to lower borrowing costs for large urban bodies and encourage greater participation in the corporate bond market. Sitharaman proposed an incentive of ₹100 crore for a single bond issuance exceeding ₹1,000 crore.

“The current scheme under AMRUT (Atal Mission for Rejuvenation and Urban Transformation), which incentivises issuances of up to ₹200 crore, will also continue to support small and medium towns,” Sitharaman said in her Budget speech.

According to reports, municipalities raised about ₹1,000 crore through the corporate bond market between April and November 2025. CareEdge Ratings estimates that municipal bond issuances could reach nearly ₹2,000 crore in FY26. Municipal corporations such as Surat, Indore, and Nagpur are expected to benefit from the policy move, Mint reported.

As highlighted in the Economic Survey 2025–26, a well-developed corporate bond market can help lower the cost of capital for Indian entities through competitive pricing, improved liquidity, and more efficient price discovery. The market is estimated to unlock a potential of ₹100 trillion–₹120 trillion by 2030, which could significantly reduce intermediation costs, particularly for mid-market segments.

Over the past decade, India’s corporate bond market has reported sustained growth, with the highest-ever fresh issuances worth ₹9.9 trillion recorded in FY25, the Economic Survey highlighted. The corporate bond market accounts for 15-16% of India’s GDP.