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6. Impact of Junk Bond Market on the Indian Economy

Building a junk bond market will have a significant impact on the Indian economy.

An efficient bond market helps corporates reduce their financing costs. It enables them to borrow directly from investors, bypassing the major intermediary role of a commercial bank.

A well-functioning corporate bond market allows firms to tailor their asset and liability profiles.

If companies fear they will not be able to raise long-term resources, they are likely to stay away from long-term investments or entrepreneurial ventures that have a long-term payoff. In the long run, this can affect economic growth.

From the macroeconomic perspective, if the right savings instruments are not available there is the danger that despite having investible surpluses, these cannot be channelised into productive investment.

In the absence of a corporate bond market, a large part of debt funding comes from banks. In the process, banks assume a significant amount of risk due to maturity mismatch between short-term deposits that can be readily withdrawn and relatively long-term illiquid loan assets.

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* Contributed by -
Neha Agarwal & Padmakar Kulkarni,
PGDIM - XI,
NITIE, Mumbai.