Indian Bond Issuance Set to Surge to Rs. 10.6 trillion in FY2025: ICRA

ICRA, a prominent credit rating agency, has projected a significant rise in domestic bond issuance to Rs. 10.6 trillion in FY2025. Despite a slight moderation in the overall incremental credit expansion, the domestic debt capital market remains robust and attractive for large corporates.

Overview of Incremental Credit Flow

ICRA forecasts that the incremental credit flow in the Indian economy from domestic sources will moderate to Rs. 24.5 trillion in FY2025, down from the record high of Rs. 25.4 trillion achieved in FY2024. The non-food bank credit (NFBC) is expected to see a slight decrease from its peak in FY2024, but bond issuances are anticipated to rise further.

Factors Driving Bond Issuance Growth

Mr. Sachin Sachdeva, Vice President & Sector Head at ICRA, highlighted the favourable conditions for corporate bond issuances, predicting an increase to Rs. 10.6 trillion in FY2025 from Rs. 10.2 trillion in FY2024. This surge is attributed to competitive funding conditions in domestic markets compared to developed markets, where interest rates are expected to remain elevated. As a result, large corporates are likely to continue favouring domestic sources for their borrowing needs.

The corporate bond outstanding is projected to grow to Rs. 50.3 trillion by the end of March 2025, reflecting a year-on-year growth of 9.5%. Over the past two years, competitive funding conditions have led large corporates to tap more into domestic funding sources. Strong demand for loans from retail borrowers and non-bank finance companies (NBFCs) also played a significant role in this trend.

Record-High NFBC Expansion

The highest-ever NFBC expansion of Rs. 22.3 trillion in FY2024 far outpaced the incremental NFBC expansion of Rs. 18.2 trillion recorded in FY2023. This remarkable growth was driven by robust demand from retail borrowers and NBFCs, significantly boosting the incremental flow of credit from banks.

Corporate Bond and Commercial Paper Issuances

The incremental credit flow was further supported by record-high corporate bond issuances of Rs. 10.2 trillion in FY2024, marking a year-on-year increase of 16.9%. This led to the stock of corporate bonds outstanding rising to an estimated Rs. 46.0 trillion as of March 31, 2024, from Rs. 43.1 trillion a year earlier. Additionally, the stock of commercial papers (CPs) outstanding increased by Rs. 0.4 trillion in FY2024, reaching Rs. 3.9 trillion as of March 31, 2024.These three sources—bonds, NFBC, and CPs—cumulatively accounted for an all-time high incremental credit flow of Rs. 25.4 trillion in the domestic market in FY2024.

Regulatory and Market Dynamics

Recent regulatory actions on unsecured retail loans, bank funding for NBFCs, and tight liquidity in the banking system may constrain incremental credit growth from banks. However, the yield on Indian Government Bonds (IGBs) is expected to remain stable, driven by demand from foreign portfolio flows upon the inclusion of IGBs in global indices. This stability is likely to enhance the competitiveness of funding from debt capital markets compared to bank borrowing, further driving corporate bond issuances.

Outlook for FY2025

While growth in incremental credit flow is expected to taper off due to tight liquidity, the support from foreign flows in IGBs will remain positive for corporate bond issuances. Consequently, ICRA estimates that the incremental total credit expansion (encompassing bonds, NFBC, and CPs) will dip slightly to Rs. 24.5 trillion in FY2025.

In summary, while overall incremental credit expansion is set to moderate, the domestic bond market is poised for significant growth. This reflects the continued attractiveness of domestic debt capital markets for large corporates amidst competitive funding conditions and a favourable regulatory environment.