Introduction
While considering your options as an investor, one crucial factor you'll want to understand is liquidity in the corporate bond market, as that will help you with your decision-making. The liquidity factor is essential for the Indian corporate bond market. It is estimated to reach ₹47–51 trillion by mid-2025, as it decides how quickly bonds can be bought or sold without affecting the market price. This blog will explain why liquidity matters, liquidity risks, and how you can transact in the Indian corporate bond market.
What is liquidity in the bond market?
In the corporate bond market, liquidity represents the capacity to immediately transact in corporate bonds at a reasonable price, without impacting or dramatically changing the price. A liquid market means selling corporate bonds with reasonably minimal loss; an illiquid bond market means selling corporate bonds will require you to accept a lower price or take time to sell. In India, the percentage of outstanding corporate bonds trading monthly is only approximately 3.8%, much less than in the equity markets, as many investors are buying bonds with the intention of holding them to maturity.
Why Liquidity is Important for You
Liquidity in the corporate bond market has a significant impact on your investment experience. Here's why it is essential:
Investor Confidence - Confidence associated with liquidity stems from knowing you can quickly exit your investment in an unfamiliar economic environment, such as a rise in interest rates.
Price Efficiency - Liquid bonds imply an accurate market reflection of value, which can mitigate the potential risk of buying and selling bonds at distorted prices.
Market Resilience - A liquid market supports bond issuers by effectively reducing borrowing costs. When bonds are in high demand, they can offer a competitive rate of issuance, which benefits the broader economy.
Risk Mitigation - Liquidity will mitigate bond liquidity risk; the risk of a loss associated with being unable to sell the bond without a price reduction.
In India, most of the trading liquidity is generated by institutional investors. However, reforms in the country are increasing retail participation, with trading volumes growing approximately 25% year over year in 2025.
Recognising Bond Liquidity Risk
Bond liquidity risk refers to the risk of not being able to sell a bond and convert it to cash without realizing a substantial markdown on the price. Simply put, liquidity risk is high in the Indian corporate bond market because very little trading activity occurs in the secondary market, as investors hold their bonds until maturity. Even though peak trading volumes in the bond market are almost at ₹21,560 crore (as in 2025), a retail investor still faces bond liquidity risk. Furthermore, bond prices may decrease when a bond is illiquid, or during periods of market turbulence, whereby market yield on bonds increases too, consequently placing the investor in a position to sell a bond for a loss to another buyer.
Risk Indicators for Bond Market Liquidity
To provide perspective to your understanding of bonds in the market, it is important to attain a level of familiarity with the following indicators:
Market trading volume and frequency of rotation: Bonds traded on exchanges like the NSE or BSE, which are or have been active, are generally more liquid than bonds that experience low trading volumes. Frequent trades mean more potential buyers and sellers in the bond market.
Bid-ask spread: This refers to the gap between the price an investor will pay to purchase the bond (ask price) and the price an investor is willing to receive when selling the bond (bid price). The tighter the spread, the more liquid the bond, i.e., the less expensive it will be to complete the transaction.
Credit Ratings: Bonds rated AAA or AA from a reliable issuer contain less risk, garner investor interest, and tend to be more liquid.
Bond issue size and maturity: Bond issues with a larger issuance size are generally more liquid due to the interest of more investors, and trading shorter maturities is easier with the maturity approach.
How regulators facilitate liquidity
The Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) acted to improve liquidity in the Indian corporate bond market by: Centralised platforms that report the price and volume of issues very quickly help enhance transparency in the market, the requirement of private bonds to have simple more public issuance listing requirements, reducing the minimum ticket size down to ₹1,000 to reduce barriers for retail investors, to regulate online bond platforms so that bonds listed could be accessed more easily by market participants.
Even though significant funds remained dominant in 2025, these changes delivered an increase of 25% in trading volumes, resulting in a market that was more accessible to investors.
Conclusion
Liquidity in the corporate bond market is significant for your investment success. An understanding of bond market liquidity indicators and ways to manage risk will help you create and manage a portfolio that is resilient to liquidity risk. With India's bond market changing due to regulatory backing and growing retail interest, being knowledgeable can help you position yourself to assess if you can take advantage of the opportunity at the right time. The Motilal Oswal team will work closely with you to experience this new and exciting world in support of your personal financial goals.
Also Read: Best Corporate Bonds for investors in India for 2025 | Investor’s guide to the Corporate bond market