Budget 2026 has revived an important yet often overlooked question: Can a large, rapidly growing economy continue to depend mainly on banks to finance its expansion? While it sets the right direction, debt markets deepen through persistence, says V Shunmugam
l Market-making in corporate bonds is a big deal
BUDGET 2026 HAS proposed creating a market-making framework for corporate bonds to tackle a key issue in India’s bond market: illiquidity. Most corporate bonds are privately placed and kept until maturity by a limited group of investors. Trading in the secondary market remains sparse, prices lack transparency, and exiting positions is uncertain—especially for retail investors and smaller institution-al investors.
Market makers help by continuously providing buy and sell prices, thus narrowing bid-ask spreads and enhancing price discovery. In the US, dealer-based market-making, backed by post-trade transparency, serves as a key liquidity anchor. The Budget signals intent, likely through the Securities and Exchange Board of India-led frameworks, potentially complemented by fiscal or institutional support.But debt markets deepen through persistence. Further steps could include expanding repo markets for corporate bonds, encouraging insurance and pension participation, standardising issuance sizes, an insolvency regime for municipal bonds, and strengthening bondholder recovery frameworks.
l Corporate bond index vs Nifty
A CORPORATE BOND bond index monitors a portfolio of bonds selected on the basis of parameters such as credit quality, maturity and yield, rather than market capitalisation. Unlike equity indices such as Nifty or Sensex, which depict growth prospects and price momentum, bond indices primarily reflect changes in interest rates, credit spreads, and duration risk. This distinction is important. Equity indices focus on ownership and earnings growth, while bond indices emphasise income, risk, and stability. A corporate bond index serves as a clear benchmark for pricing, performance evaluation and risk management. More importantly, indices facilitate derivatives. Bond index futures and swaps let investors hedge interest-rate risk, gain exposure without purchasing multiple bonds, and manage portfolios more efficiently.
l Can bond-index derivatives help?
DERIVATIVES ON CORPORATE bond indices do not substitute cash bonds; instead, they complement them. For institutions, these derivatives help lower balance-sheet pressure and facilitate effective risk transfer. For retail-focused products, mutual funds and ETFs can better manage duration and credit risk, leading to enhanced stability and liquidity. In practice, a pension fund can hedge interest rate risk by using an index derivative rather than selling bonds. This allows a fund manager to quickly obtain diversified exposure while awaiting primary issuance. Gradually, this strengthens both the cash and derivative markets, a trend observed in developed fixed-income markets.
l Why total return swaps now
TOTAL RETURN SWAPS (TRS) enable one party to gain the full economic returns of a bond or bond index—interest and price changes—without owning the bond itself. These swaps are primarily over-the-counter (OTC) instruments used globally. For institutional investors, TRS provides exposure without the need to fund the entire principal amount. For the market, TRS fosters increased participation and liquidity without immediately expanding balance sheets. Introducing TRS into the corporate bond market helps India align with global fixed-income practices and lowers entry barriers for investors exploring credit exposure for the first time.
l Benefits of a FEMA review
ALTHOUGH THE BUDGET’S Foreign Exchange Management Act (FEMA) review for non-debt instruments seems to focus on equity, it also indirectly favours debt markets. Streamlined foreign investment regulations enhance capital mobility, lower compliance hurdles, and attract global investors who invest in both equity and debt. Confidence in capital rules promotes more extensive and stable participation across different asset classes.
l Why municipal bonds matter
URBAN INFRASTRUCTURE CONTINUES to be underfunded. Municipal bonds present a market-driven solution—provided there is strong governance to support them reforms.
Today, municipal bond issuance in India is limited, sporadic, and concentrated in a few better-managed cities. Financial support alone is insufficient. Achieving sustainable growth necessitates standardised disclosures, predictable revenue streams, credit enhancement mechanisms, and ultimately a resolution framework for distressed urban areas bodies. In this context, the proposed fixed cash incentive (for example, Rs 100 crore) for a bond issue that crosses a defined size threshold (e.g., Rs 1,000 crore) and will go a long way in promoting issuances. India’s Budget support is a start—but institutional capacity and regulatory architecture will determine success.
The writer is partner, MCQube
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.