Corporate Bond Market in India: Pricing, Yields & Opportunities

Introduction

India’s corporate bond market is an essential part of the country’s financial system. It enables companies to raise long-term capital, diversify funding sources, and support growth initiatives. For individuals and institutions studying fixed income, corporate bonds offer varied maturities, structures, and yield levels influenced by issuer quality and market conditions.

This article explains how corporate bond prices and yields are formed, how the market functions, and what shapes opportunities across different categories of issuers.

What Is the Corporate Bond Market?

The corporate bond market consists of debt securities issued by private companies, listed corporations, public sector undertakings (PSUs), financial institutions, and non-banking financial companies (NBFCs).

Purpose of corporate bonds

• long-term project financing

• refinancing existing debt

• working capital requirements

• diversification of funding sources

Corporate bonds complement bank lending by offering issuers market-linked borrowing rates.

Who Issues Corporate Bonds in India?

Corporate bond issuers include:

✔ Large Corporates

Companies in manufacturing, telecom, energy, and infrastructure.

✔ Banks & Financial Institutions

Tier-2 or Basel-III compliant bonds.

✔ NBFCs

To support lending operations.

✔ PSUs

Public-sector enterprises issuing secured and unsecured bonds.

✔ Infrastructure Companies

For long-term project financing.

This variety results in a diverse market offering differing risk–return profiles.

How Corporate Bond Prices Are Determined

Corporate bond prices reflect the present value of future coupon payments and principal repayment.

Prices fluctuate due to:

1. Changes in interest rates

When interest rates rise, bond prices tend to fall; when rates fall, prices generally increase.

2. Credit outlook

Issuer upgrades may lead to price appreciation; downgrades may cause price declines.

3. Market liquidity

Highly traded bonds maintain stable prices; less-traded bonds can experience wider spreads.

4. Demand–supply dynamics

Institutional and retail interest may influence traded prices.

Pricing reflects both market conditions and issuer-specific fundamentals.

What Influences Corporate Bond Yields?

Corporate bond yields are shaped by:

1. Benchmark Government Bond Yields

Corporate yields typically add a credit spread over government securities.

2. Credit Rating

Lower-rated issuers offer higher yields as risk compensation.

3. Maturity

Longer maturities usually offer higher yields due to duration risk.

4. Liquidity Conditions

Better liquidity can lower yields; weaker liquidity may require higher yields.

5. Economic Environment

Growth expectations, inflation, and policy decisions impact yield levels.

The spread between government and corporate bond yields indicates the market’s perception of risk.

Credit Ratings & the Risk–Yield Relationship

Credit rating agencies evaluate the financial health of issuers. Common categories include:

• AAA (highest-rated)

• AA / A (strong, but lower than AAA)

• BBB (medium risk)

• BB and below (considered high-yield)

Key Principle

Lower credit rating → higher yield

Higher credit rating → lower yield

This risk–return tradeoff is central to understanding opportunities across varying credit segments.

Types of Corporate Bonds in India

The corporate bond market includes multiple structures:

1. Secured Bonds

Backed by specific assets or cash flows.

2. Unsecured Bonds

No collateral backing; dependent on issuer strength.

3. Fixed-Rate Bonds

Offer stable coupon payments.

4. Floating-Rate Bonds

Coupon resets at intervals based on reference rates.

5. Perpetual Bonds

No fixed maturity; callable by the issuer.

6. Subordinated Bonds

Rank lower in repayment hierarchy; typically higher yielding.

7. Zero-Coupon Bonds

Issued at a discount; no periodic interest.

This diversity creates both opportunities and structural differences across categories.

Primary vs Secondary Market Activity

Primary Market

Issuers raise fresh capital by offering bonds through public or private placements.

Secondary Market

Bonds are traded between participants on exchanges or through debt-market systems.

Prices and yields here reflect ongoing market sentiment.

Some corporate bonds trade frequently, while others may have limited secondary activity.

Liquidity & Trading in the Corporate Bond Market

Liquidity varies across the corporate bond market due to:

• issuer size

• rating

• maturity

• demand from institutional investors

Highly traded

AAA / AA PSU and financial-sector bonds.

Moderately traded

Longer-dated or lower-rated corporate issuances.

Less traded

Small private placements or non-standard structures.

Liquidity affects pricing accuracy and yield clarity.

Factors That Create Opportunities in Corporate Bonds

Several elements can shape opportunities within the corporate bond space:

1. Credit Spread Movements

Spread tightening may reflect improving issuer sentiment.

2. Sector Strength

Strong performance in certain industries can enhance credit outlooks.

3. Market Cycles

Changes in interest rates influence bond attractiveness across maturities.

4. Issuer-Specific Developments

Improved cash flows, deleveraging, or business expansion may affect yields.

5. Regulatory Enhancements

Better disclosure standards increase transparency.

6. Demand for Fixed Income

Institutional allocation patterns influence yield levels and pricing.

These factors collectively shape how market participants evaluate corporate issuances.

Common Misconceptions

Misconception 1: All corporate bonds offer high yields

Yield varies based on rating, maturity, and market conditions.

Misconception 2: Corporate bonds behave like fixed deposits

Bond prices fluctuate based on market forces.

Misconception 3: High yields imply strong performance

High yields may reflect higher credit or liquidity risk.

Misconception 4: Corporate bonds have uniform liquidity

Liquidity levels differ sharply across issuers.

Conclusion

India’s corporate bond market is a diverse and evolving ecosystem that connects companies with long-term financing and provides market participants with varied return and risk characteristics.

Understanding corporate bond prices, corporate bond yields, credit spreads, liquidity behaviour, and structural variations helps build a clearer picture of how opportunities emerge across different segments of the market.

Long-term, medium-term, and short-term corporate bonds each behave differently, offering unique perspectives within India's broader fixed-income landscape.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.