Rating agency Crisil and the Association of Mutual Funds in India (AMFI) are working on a detailed proposal to establish a market-making framework for corporate bonds rated in the AA to BBB categories.
The move comes as the Department of Economic Affairs (DEA) under the Ministry of Finance has initiated consultations on designing such a mechanism.
DEA Explores Two Models
The DEA is said to be exploring two broad models: one involving a government-backed organisation acting as a market maker to provide continuous buy and sell quotes, and another allowing private entities with sufficient capital and net worth to take on the role, potentially supported by government backstop facilities to mitigate risk.
Aimed at deepening India’s debt markets, the initiative is expected to cover spread management, inventory handling, and regulatory safeguards. The goal is to create a transparent ecosystem where both institutional and retail investors can transact in sub-AAA bonds with greater ease and confidence. Emails sent to both Crisil and AMFI went unanswered.
Improving Liquidity and Opening Funding
A banker familiar with the discussions said, “The DEA’s initiative is a crucial step toward broadening India’s debt markets and aligning them with the needs of a rapidly evolving economy. For investors, it will offer the comfort of tradability, while for issuers, it opens new avenues of funding. Easy access to debt financing will not only strengthen MSMEs but also support sectors such as NBFCs, housing finance companies, and startups, which are vital for India’s economic resilience.” Currently, 66-67% of paper traded in the bond market is AAA-rated, while 33-34% is AA-rated, leaving hardly any trading for high-yielding papers. This skew has contributed to low trading volumes and limited liquidity in the secondary market.
“Liquidity in sub-AAA bonds remains thin, leaving investors with limited exit options and discouraging participation despite the demand for higher yields,” said a CEO of a domestic SEBI registered OBPP (online bond platform provider), who believes many MSMEs and mid-tier companies do not enjoy AAA ratings, which limits their ability to raise funds through the bond market. By creating a liquid and transparent market for AA and BBB bonds, the government hopes to channel capital more efficiently to these enterprises.” He added that the framework would also provide investors with greater confidence in trading lower-rated securities. A more active sub-AAA market gives investors smoother entry and exits and benefits from better rate transmission.
Industry experts believe that if implemented, the market-making mechanism could transform India’s corporate bond landscape, bringing standardisation, transparency, and liquidity to a segment long considered opaque and illiquid.
