The Union Budget (2026–27) proposal to introduce Total Return Swaps (TRS) in the corporate bond market could mark a structural shift in how investors access credit risk, how liquidity is created, and prices are discovered in India’s largely illiquid secondary bond market, experts said. While the proposal has raised expectations, market participants said clarity on the final framework will be key to determining how quickly TRS gains traction.
A TRS is a derivative contract where one party receives the total return of a bond—coupon income plus price appreciation or depreciation—without owning the underlying security. The swap provider, typically a bank, holds the bond on its balance sheet and the buyer will pay a fixed or a floating fee to the bank.
For example, a bank holds a Rs 100 crore corporate bond. An investor enters into a TRS and receives the bond’s interest income along with any price appreciation or depreciation. In return, the investor pays the bank a floating rate, such as MIBOR or another money-market benchmark plus a spread. This allows the investor to gain exposure to the bond without owning it, while the bank retains the security to hedge risk.
Focus is likely to be on higher-rated paper
“… this helpe shift bond inventory to regulated intermediaries and enabling smoother price discovery and liquidity without forcing frequent cash market trades,” said Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP.
When asked which bonds could be considered under the arrangement, market participants said the initial focus is likely to be on higher-rated paper as moving lower on the credit curve could make pricing difficult.
“Lower-rated bonds may be considered later, but the AA segment offers better liquidity and more efficient pricing,” a market participant said.
On the market-making framework, Dhawal Dalal, CIO – fixed income at Edelweiss AMC said that it could help bring more liquidity in corporate bonds, similar to the role played by primary dealers in government securities. “Clarity is needed on how positions will be funded and how exposures will be hedged,” he said. “Market will also need to develop benchmarks in corporate bonds like IGBs (Indian government securities),” he added.
Stronger liquidity could reduce borrowing costs
Over time, stronger liquidity could reduce borrowing costs for issuers and encourage broader bond issuance, market participants said. “What will matter is the final framework, especially around who the eligible market participants are and who can actually take exposure through TRS. If the eligible market participants are aligned with instruments like CDS (credit default swap), then TRS could become an option for leveraged positions by AIFs, and conversely a hedge for market makers,” Jiju Vidhyadharan, senior director at Crisil Intelligence said. The likely participants would mainly be banks or primary dealers and institutional investors such as mutual funds, alternate investment funds, insurers, FPIs and hedge funds.
Last year, global banks like HSBC and Standard Chartered were allowed to offer total return swaps on corporate bonds, in GIFT City. “See these will work only if there is some secondary market liquidity. There is zero secondary market trading as of now,” an IFSCA official said.
India’s corporate bond secondary market remains shallow, with sporadic trading and limited two-way quotes. However, recent data from IndiaBonds suggests that activity has begun to accelerate meaningfully. The number of secondary trades has already surpassed the previous full-year total within the first eight months of FY26, while trading volumes are on track to grow over 30% year-on-year.