Foreign institutional investors have recently become a driving force in India’s secondary market for corporate bonds, accounting for almost half of overall volumes in the first four months of 2010, says UK bank RBS. They have also hit their ceiling for investments in government securities (GSecs).

However, the Indian authorities are considering raising the aggregate thresholds, which stand at $5 billion for GSecs and $15 billion for corporate bonds, added RBS in a report on the country's fixed-income market published yesterday.

But it’s a gradual process. “While the Indian fixed-income market is characterised by a well-defined set of rules and regulations and a deep, mature GSec market,” says the bank. “the slow growth of the corporate bond market as well as retail investors’ participation are areas for future development.”

“Although credit rating and issuer knowledge are generally quite well developed relative to other emerging markets, an active secondary market and credit curve have not fully evolved,” adds RBS. “Addressing these deficiencies are acknowledged priorities of the Securities and Exchange Board of India.”

The Reserve Bank of India, for its part, has every now and then initiated measures to develop the corporate bond market, which stands at "barely a fraction" of the government bond market, says the report.

Among domestic institutions, the major investors in the GSec market include banks, pension funds and insurance companies, with banks accounting for just below 70% of the total market.

Meanwhile, retail investors have very low participation in the fixed-income market, but over the past few years, they have gradually increased their participation in mutual funds and bond funds, says RBS. To enable small and medium-sized retail investors to participate in the auction process, the RBI has introduced non-competitive bidding in GSecs.

On the supply side, central and local governments are the biggest issuers in the market, notes RBS, with banks and financial institutions the next largest.

But corporate issuance has not been keeping pace with the average market growth over the years. The average issue size of corporate bonds is a mere 1 billion rupees ($21 million), as against the average GSec issue size of 150 billion rupees.

As for tenor, the GSec market also offers the longest maturity -- of up to 30 years -- while corporate bonds have tenors going out to 20 years, says RBS. That said, the maturity profile of the GSec market is bunched up heavily in the four-year to eight-year segment.