Interest burdens to remain elevated across emerging economies - CareEdge
This story was originally published at 19:36 IST on 26 May 2026
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--CareEdge: Interest burdens to remain elevated across emerging economies
--CareEdge: Limited rollover risks a positive for G-sec market
--CareEdge: Limited retail, FII participation a gap in G-sec market
--CareEdge: Lower secondary-market trading volumes a gap in G-sec market
--CareEdge: Preference for pvt placements a challenge for corp bond mkt
--CareEdge: Poor liquidity, regulatory restrictions hurdle for corp bond mkt
--CareEdge: Less developed sub-sovereign debt market a gap in govt debt mkt
--CareEdge: Rise in issue of municipal bonds to continue in FY27
--CareEdge: High reliance on bank credit can increase systemic risks
--CareEdge: Lower FPI presence in corp bond mkt, domestic investors dominate
MUMBAI – Sovereign debt is experiencing the steepest increase and interest burdens are expected to remain elevated across many emerging economies, CareEdge Ratings said in a report. Elevated fiscal deficits across several economies are expected to reduce policy flexibility available to governments in responding to future shocks. Moreover, foreign participation in the Indian government debt market remained subdued. Poor liquidity and regulatory restrictions remained a hurdle for the Indian corporate debt market, according to the report.
Indian debt markets remain largely dominated by domestic investors, while retail and foreign participation remains muted. The share of G-sec holdings by commercial banks has declined while that of insurance companies, pension and provident funds has increased. This trend also complements the government's objective of lengthening the maturity profile of central government bonds.
While the inclusion of India's government bonds in global bond indices such as JP Morgan's Government Bond Index – Emerging Markets and the Bloomberg Emerging Market Local Currency Government Index helped deepen the Indian government debt market, investments from foreign portfolio investors will remain critical going ahead. As of May 11, foreign portfolio investors had utilised only 9% of the total designated government securities by the fully accessible route. The Indian corporate debt market remained largely dominated by domestic players, with foreign portfolio investors accounting for only 5.4% of total holdings.
Trading volume in the Indian debt market remained subdued, which kept India's government bond turnover ratio at 0.9% as of FY24. Furthermore, government bonds held in held-to-maturity books also weighed on the trading volume in the secondary market.
State government bond issuances rose, with banks, insurance companies, and provident funds being the major holders of outstanding state government debt securities. Issuance of municipal bonds also rose in the span of FY18 to FY26 and which is likely to continue in FY27. Central and state governments provided incentives to further deepen the municipal bond markets.
The debt-to-GDP ratio has eased, moderating to an estimated 81.8% in FY26 from 89% in FY21, but remained well above the pre-pandemic average of 68.8%. Even though India's debt levels are expected to stay manageable in comparison to other major economies, the emerging fiscal pressures amid the ongoing West Asia crisis will be a challenge for the government's fiscal consolidation trajectory.
The banking sector has continued to dominate resource mobilisation by the commercial sector. The commercial sector's heavy dependence on bank credit can heighten systemic risks by concentrating sector-specific exposures within the banking system, increasing contagion risks through interconnected channels such as payments and deposits, and amplifying credit cycles during periods of economic stress.
On the corporate bond market front, the share of corporate bonds and commercial papers has moderated to 25% in FY20-FY26 compared to 31% in FY10-FY19. Private placements dominate the corporate bond market, which resulted in muted retail participation in the corporate bond market.
In order to deepen the Indian corporate debt market, the Securities and Exchange Board of India, the Reserve Bank of India and the government introduced several policy measures which include infrastructure investment trusts and real estate investment trusts. Some other measures include relaxation of foreign portfolio investment norms, allowing alternate investment funds to participate in credit default swaps and allowing stock exchanges to offer futures contracts on corporate bond indices. End
Reported by Janwee Prajapati
Edited by Deepshikha Bhardwaj
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