Reviving India's Fixed-Income Market Foundation: Budget 2025 Expectations, Call To Action & Outlook

2024 was a year of balance for India's fixed-income markets. We saw solid gains, with benchmark 10-year government bond yields stabilizing between 6.7% and 6.9%. Key developments included the inclusion of Indian government bonds in global indices like JPMorgan GBI-EM and Bloomberg, which attracted over $23 billion in inflows, strengthening foreign investor confidence. The RBI's pause on repo rate hikes maintained market stability, particularly benefiting debt-dependent sectors. Additionally, the RBI's Retail Direct Scheme experienced a 12% rise in participation, largely focused on government securities.

Despite these gains, challenges remained. Corporate bond market liquidity stagnated, with turnover ratios lagging behind developed markets. The withdrawal of indexation benefits for debt mutual funds led to a 17% decline in assets under management for fixed-income schemes. Moreover, sectors like infrastructure and real estate, which represent 40% of outstanding corporate debt, struggled with high refinancing costs due to weak credit profiles.

The Cracks In The System

India's bond market is valued at USD 2.59 trillion, with corporate bonds at USD 0.56 trillion, making up just 16% of the country's GDP. In 2024, private placements dominated issuance activity, accounting for 86% of the total, signaling the urgent need for public issuance incentives. Meanwhile, investment by FPI in the government securities (G-sec) under the Fully Accessible Route (FAR) has increased to Rs 2.51 lakh crore as of December 31, 2024, as compared to Rs 1.30 lakh crore on January 1, 2024.

Liquidity is thin, and secondary trading is dismally low. While the RBI's Retail Direct Scheme has made government securities accessible, corporate bonds remain elusive for individual investors. For India to truly leverage its corporate bond market, the focus must be on liquidity. Globally, liquid markets thrive on active institutional participation. Regulatory incentives for market makers, increased transparency, and frameworks to promote smaller, frequent issuances could drive participation.

For real estate and infrastructure players, refinancing risks are mounting, as tighter regulations and global interest rate volatility add pressure. That being said, budget 2025 must explore shared risk mechanisms, securitization, or targeted credit enhancement guarantees to ease refinancing for these critical sectors.

Moreover, policy support has been quite varied. The removal of indexation benefits for debt mutual funds has significantly impacted investor confidence, creating an uneven playing field against equities. These aren't new challenges, but the urgency to address them has never been greater.

Budget 2025: Key Expectations and Predictions

In light of these challenges, the market anticipates several key reforms from Budget 2025. Market participants are looking for policies that reduce friction, such as real-time settlements and lower GST on bond transactions. Additionally, international investors, drawn by India's inclusion in global indices, expect deeper reforms to sustain their interest. Some of the key priorities could be:

• Restoration of Tax Incentives: The reintroduction of indexation benefits for debt mutual funds could revive inflows, particularly from HNIs and retail investors. This is crucial, given the $17 billion decline in AUM post-tax policy changes.

• Boosting Corporate Bond Market Liquidity: Measures like allowing pension funds to invest in lower-rated bonds and creating a robust market-making framework could elevate secondary market activity, with a targeted turnover ratio of 0.3 by 2026.

• Incentivizing Green Bonds: With India's green bond issuances crossing $2.5 billion in 2024, budgetary incentives such as tax breaks could further this momentum, aligning with the nation's net-zero targets.

• Sectoral Refinancing Support: Budget provisions for risk-sharing mechanisms in infrastructure and real estate could mitigate refinancing pressures, stabilizing $450 billion in sectoral debt.

As India strives to become a developed economy by 2047, the evolution of its debt markets will be pivotal in realizing this vision. The key to unlocking long-term economic stability lies in creating a robust, transparent, and liquid debt market. Budget 2025 holds the potential to not only address the immediate structural challenges but also lay the foundation for a transformative shift in India's financial landscape.

By aligning fiscal priorities with the evolving needs of the market, India can position its debt markets as a cornerstone of capital mobilization-driving economic growth, supporting infrastructure development, and creating a sustainable investment environment. The upcoming reforms, if executed with foresight, could catalyze the next phase of India's economic ascent, fortifying its place as a global financial leader.

In the broader context, these reforms can set the stage for deeper market integration, both domestically and internationally, and drive the next wave of investment, positioning India's fixed-income market as a hub for global capital inflows.