One significant announcement in the budget relates to the introduction of market makers in India’s corporate bond market. This idea has been around for some time, with the Securities and Exchange Board of India (Sebi) having released a paper on it. Market makers are entities that get certain benefits for creating liquidity in a market. As a corollary, once this is enabled, retail access gets easier.
In the government securities (G-Sec) market, for example, primary dealers do this job when they subscribe to primary issuances. In the secondary market, they provide ‘buy’ and ‘sell’ quotes. This means that they hold on to securities and place them on offer for buyers to purchase. They take the risk of price changes but get regulatory benefits in return. This gives G-Secs liquidity.
This is the theoretical part. Let us look at India’s G-Sec market.
There are presently about 120 issued securities of long-term tenure with a combined outstanding liability of around ₹120 trillion. Specific amounts vary across securities depending on their importance. While this market is liquid, this is unevenly so. In the first nine months of 2025-26, for example, data shows that almost 60% of the trading was in 10-year paper, while another 18-20% was distributed across 5- and 15-year bonds. The rest were quite insignificant. This means that even market-making does not work fully for a majority of issued G-Secs.
Notably, only benchmark securities trade in high volumes. Even with these, it is the 5, 10 and 15-year securities that top the list. The rest are usually dormant. Within these three, the 10-year bond dominates, serving as a reference for the bond market and yields. It is also used for global comparisons.
Interestingly, this security changes once every year as new benchmarks are announced. For example, the 2035 security at the beginning of 2025-26 would be replaced by the 2036 bond as the benchmark, with the 2035 one gradually losing its sheen. Also, while the benchmark sees significant trading volumes, once it has less than 10 years left to maturity and is replaced, trades drop off. This makes liquidity a challenge even in the G-Sec market.
In the corporate bond market, things get even more complex. In the case of G-Secs, the issuer is the Government of India, so there is only one issuing party. But there are multiple bonds issued by various companies in the market for corporate bonds.
Further, AAA-rated bonds, which are deemed relatively safe and typically carry lower coupon rates than lower-rated paper, can have yields that vary across private companies and public sector issuers. If a market maker comes in, which securities should it be dealing in? Should it go by companies, ratings, tenures or yields? This requires some clarity.
Sebi has tried to bring in the concept of re-issuance of a security—a security issued by, say, company ABC with a maturity date of 2040 will have future issuances. This would increase the quantity of floating securities. But it won’t necessarily work, as issuers also need to have issuances with maturities that fit their asset-liability mix. Besides, even if a maturity date is harmonized, the market maker will have to sift through the list and decide which companies to back while fulfilling the responsibility of market making.
Another issue, a broader one, is that major debt subscribers are financial institutions such as insurance companies, pension funds and provident funds, among others. These are typically ‘buy and hold’ subscribers, as they buy bonds to match their long-range asset-liability profiles and are usually not interested in trading. Mutual funds could trade in bonds, though they may not do it very regularly since their own rating, which is judged on the basis of portfolio stability, could take a hit. Hence, while talking of market making, we need to also identify counter-parties as buyers and sellers.
There has been talk of getting retail investors into the market for corporate bonds. But that is hard because of limited liquidity. One can buy and sell a share of a company any time, as there are counter-parties available. But this does not hold for corporate bonds. Further, understanding a bond price is complex, as yields and prices move in opposite directions and interpreting movements requires some specialized knowledge.
While tracking a portfolio of bonds held, a retail investor may not realize that a 10-year bond has turned into 9-year paper after a year. So getting counter-parties to market makers will be a challenge, unlike in the country’s G-Sec market, where banks are major players as their treasury operations are a business activity.
The way forward may be to focus on nudging retail investors towards debt mutual funds. Fund managers who handle portfolios could invest in corporate bonds. This was indeed popular before Indian tax rules became asymmetric and debt returns began being taxed at the income-tax slab rate while equity gains continued to be taxed at capital- gains rates.
Revisiting these tax rules could make a difference. Perhaps the tax imposed on interest earnings from bank deposits could also be brought to parity; it would help elevate financial savings in the economy. This could be taken up in India’s next budget.
These are the author’s personal views.
The author is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’.