Development of the Corporate Bond market in India: an Empirical and Policy Analysis Sunder Raghavan 1+ and Daniel Sarwono 2 1 Dept. of Finance, Economics and Information Systems, College of Business, Embry-Riddle Aeronautical University 2 College of Business, Embry-Riddle Aeronautical University. Abstract. This study is a pioneering study on the factors influencing the corporate bond market in India. Important aims of this study are to trace the development of corporate bond markets in India, identify factors which have influenced its development and suggest policy reforms to enhance its development. Based on multivariate regression analysis this paper analyses the factors that have influenced the development of the corporate bond markets in India. Our results show that while the growth of the government bond market has been a major positive influence in the development of the corporate bond markets in India, bank lending in India may have slowed the development of the corporate bond market. Other factors such as the size of the economy, openness, size of the stock market and institutional factors like corruption have had little or no impact on the development of the corporate bond market. Based on our study we suggest policy reforms to improve the corporate bond market in India. Suggested policy reforms includes improving the retail investment markets through issue of Swadeshi or patriotic bonds, encouraging foreign participation by relaxing regulations and providing tax incentives, providing credit enhancements and introduction of new instruments such as credit default swaps and corporate repos. Keywords: Capital Markets, Corporate Bond Market, India, Emerging Markets. 1. Introduction Jiang, Tang and Law point out that one of the principal benefits of a well developed corporate bond market is to provide an effective alternative source of financing to bank financing [1]. Further, Luengnaruemitchai and Ong in their IMF working paper feel that core aspects such as benchmarking, corporate governance and disclosure, credit risk pricing, the availability of reliable trading systems, and the development of hedging instruments are fundamental for improving the breadth and depth of corporate debt markets [2]. A well-developed domestic capital market consists of the equity market and the bond market. While India boasts of a world-class equity market its bond market is still underdeveloped and is dominated by the government bond market. For instance, the value of outstanding government bonds in India was 39.5% of GDP as of 2010 and compares favorably with other Asian countries such as China (27.6%) and South Korea (47.2%). The value of corporate bond outstanding in India however was only 1.6% of GDP in 2010 compared to Malaysia (27%) and South Korea (37.8%) at the end of 2010. Torre, Gozzi and Schmulker argue that there are two basic approaches to develop capital markets in general in emerging markets [3]. The first view explains the gap between expectations and observed outcomes due to the combination of impatience with imperfect and incomplete reform efforts. The second view; is similar to the view taken by the Committee for Financial Sector Reform in India (CSFR), which is to get a number of other policy developments and missing markets need to be created before the corporate bond markets can develop in a country [4]. The objective of this policy paper is twofold. First it traces the development of the corporate bond market in India and conducts an empirical analysis of the factors influencing these developments. + E-mail address: ragha8d6@erau.edu 2012 International Conference on Economics and Finance Research IPEDR Vol.32 (2012) © (2012) IACSIT Press, Singapore 49