Niti Aayog, the government think tank, has recommended special bond accounts, demat trading of listed bonds, facilitating purchases through mobile and internet banking, and tax incentives for investments in corporate bonds to boost retail participation in the bond market.
A report by Niti Aayog on deepening the corporate bond market in India notes that retail participation is currently less than 2%, and there is a need to lower entry barriers for individual investors. It suggests tax benefits, lower investment thresholds, and UPI-based transactions to encourage more retail activity.
The report says greater transparency through real-time pricing, yield calculators, and standardised disclosures—along with tax incentives, awareness campaigns, and digital marketplaces—can significantly improve participation. “Regulators may also explore a safeguarded short-selling framework to enhance price discovery,” it added.
One of the proposals is the introduction of a dedicated Corporate Bond Savings Account (CBSA). “A CBSA could be introduced as a tax-saving vehicle under Section 80C, similar to the Equity-Linked Savings Scheme (ELSS), encouraging long-term retail investment in corporate debt,” the report states. Banks and financial institutions can offer CBSAs, while Sebi and the Income Tax Department would define eligible bonds, limits, lock-in periods, and withdrawal norms.
The report also suggests introducing new financial instruments such as covered bonds—backed by high-quality assets like mortgages—offering safer investment options. It also proposes direct subsidy bonds, which would provide issuers with incentives such as government-funded cash rebates to reduce net interest costs and make bond issuances more attractive.
According to the report, India could also consider launching fractional bond investment funds, which allow investors to buy into bonds with staggered maturities, spreading risk and offering periodic liquidity.
Acknowledging the limited success of rupee-denominated masala bonds, the Aayog calls for a revamped “Masala 2.0” by addressing challenges such as high issuance costs, currency volatility, and weak secondary market liquidity. These issues, it notes, can be mitigated by leveraging credit enhancements like partial guarantees from institutions such as the AIIB, thereby reducing yield spreads and improving investor confidence.
The report further recommends expanding the pool of bond issuers to deepen the market by integrating a broader range of participants, including sub-investment grade entities, MSMEs, and municipal bodies.