Why India Needs a Unified Bond Market

Q: What is meant by the ‘unification of the bond market’ in India, and why is it being proposed as a major financial sector reform?

The ‘unification of the bond market’ refers to harmonising the regulatory, trading, clearing, settlement, and holding frameworks for Government Securities (G-Secs) and corporate bonds under a single, coherent regime. At present, G-Secs are largely regulated and settled under the oversight of the Reserve Bank of India (RBI) through platforms such as NDS-OM and the Public Debt Office (PDO), whereas corporate bonds are regulated by Sebi and traded through stock exchanges and depositories. This dual structure has led to institutional fragmentation and operational inefficiencies.Unification aims to create a single operating and demat structure where investors can hold both G-Secs and corporate bonds in the same account and trade them on the same platforms. Given that outstanding G-Secs (₹115 trillion as of December 2025) are nearly double the size of corporate bonds (₹58 trillion), integrating the two markets would enable seamless pricing transmission and improve liquidity. It would also reduce transaction costs and create economies of scale and scope.From a reform perspective, unification is expected to enhance retail participation, deepen the corporate bond market, and align India’s debt markets with global best practices where sovereign and corporate bonds are traded within integrated market infrastructures.

Q: Critically analyse the argument for bringing all aspects of the corporate bond market under a single regulator.

The argument for a single regulator rests on the principle of regulatory coherence. Currently, Sebi regulates issuance and trading of corporate bonds, while the RBI controls repo operations. This division can lead to coordination challenges, regulatory arbitrage, and slower policy responses. A unified regulator would streamline rule-making, reduce overlaps, and enhance accountability.However, there are counterarguments. The RBI’s involvement stems from its mandate over monetary policy and systemic stability. Repo markets directly influence liquidity conditions in the banking system, which is central to RBI’s core functions. Removing RBI’s powers may dilute macroprudential oversight unless robust coordination mechanisms are instituted.Thus, while regulatory consolidation may improve market efficiency, it must be accompanied by strong safeguards for systemic stability. Amendments to the RBI Act, Government Securities Act, and related laws would need to carefully balance efficiency with financial stability concerns.

Bridging regulatory divides between government securities and corporate bonds

Surya

•March 3, 2026•6 mins read

Unifying bond markets to deepen India’s debt

Not Started

Unification of India’s Bond Market: Regulatory Reform and Market Deepening

1.The Case for Unifying the Bond Market

India’s bond market remains structurally segmented between Government Securities (G-Secs) regulated by the RBI and corporate bonds regulated primarily by SEBI. This dual architecture has resulted in different trading platforms, settlement systems, depositories, and regulatory approaches for instruments that fundamentally belong to the same asset class—debt.

As of December 2025, outstanding G-Secs stood at ₹115 trillion, while outstanding corporate bonds were ₹58 trillion. Despite this significant size, the corporate bond market remains underdeveloped relative to the banking system. The segmentation of regulatory and market infrastructure is seen as a structural constraint on liquidity, efficiency, and retail participation.

The proposal to unify the bond market seeks to create a single, seamless ecosystem for issuance, trading, clearing, settlement, and holding of both G-Secs and corporate bonds. This reform is positioned as a major step toward improving ease of doing business, increasing competition, and deepening India’s financial markets.

From a governance perspective, fragmented regulation increases transaction costs, reduces liquidity, and inhibits scale. If the bond market remains divided, pricing efficiency, investor participation, and market development will continue to lag, constraining long-term capital formation.

2. Retail Participation in G-Secs: Limitations of the Current RBI Framework

In November 2021, the RBI introduced a scheme allowing direct retail participation in G-Secs through:

RBI’s Public Debt Office (PDO)
The NDS-OM trading platform

However, the response has been modest. The scheme effectively requires retail investors to operate through a separate RBI depository account, distinct from their regular demat accounts.

This has led to artificial segmentation:

Corporate bonds and equities → Held in SEBI-regulated demat accounts
G-Secs → Held separately under RBI’s PDO

Unlike securities market depositories, which cover 99% of India’s PIN codes, the PDO structure is institution-centric and narrower in reach. With over 210 million demat accounts already operational, integrating G-Secs into this ecosystem could significantly enhance accessibility.

The article argues that G-Secs should be issued and traded through stock exchanges, similar to other securities, and that G-Sec-based ETFs could broaden retail participation.

“The development of a country’s financial markets is a key element in supporting economic growth.” — Bank for International Settlements (BIS)

Financial inclusion in capital markets depends on reducing friction. If G-Secs remain outside mainstream demat infrastructure, retail participation will remain limited despite policy intent.

3. Dual Trading and Settlement Mechanisms: Structural Inefficiency

Currently:

G-Secs are largely traded on NDS-OM
Settlement occurs through Clearing Corporation of India Ltd (CCIL)
Both are under RBI oversight

Corporate bonds:

Trade on SEBI-regulated platforms
Settle through SEBI-regulated market infrastructure institutions

Although SEBI’s online bond platforms (introduced in 2022) have improved corporate bond trading volumes, G-Sec activity remains concentrated under the RBI system.

This raises a structural question: Why maintain two parallel mechanisms for instruments belonging to the same debt market?

Fragmented infrastructure prevents economies of scale and scope, reduces interoperability, and complicates investor experience.

Implications:

Duplication of regulatory oversight
Higher compliance and operational costs
Reduced seamless pricing transmission
Lower liquidity integration

Efficient markets require unified infrastructure. If regulatory silos persist, India’s debt market will remain institutionally divided, weakening competition and liquidity.

4. Pricing Efficiency and Yield Curve Transmission

G-Secs dominate the Indian debt market and form the benchmark yield curve. Corporate bond pricing is intrinsically linked to the G-Sec yield curve, as spreads are calculated over sovereign benchmarks.

With:

₹115 trillion G-Secs outstanding
₹58 trillion corporate bonds

The sovereign yield curve is central to corporate bond valuation. However, separate regulatory regimes impede seamless transmission of pricing signals.

Unification would:

Enable frictionless transfer of securities
Improve price discovery
Enhance transparency
Strengthen market competition
Economic Logic:
- Integrated markets → Better liquidity
- Better liquidity → Narrower spreads
- Narrower spreads → Lower cost of capital

“Liquidity begets liquidity.” — Paul Samuelson

If pricing transmission remains imperfect due to regulatory separation, corporate bond markets will continue to suffer from illiquidity and wider spreads, limiting non-bank financing.

5. The Repo Market Constraint

An active repo (repurchase) market is essential for liquidity. Market makers rely on repo markets to finance inventory and provide tight bid-offer spreads.

Currently:

Corporate bond issuance and trading rules → SEBI
Repo in corporate bonds → RBI

This split regulatory authority creates coordination challenges.

Benefits of an Active Repo Market:

Improves liquidity in underlying bonds
Enables monetisation without selling assets
Enhances price stability
Lowers issuer borrowing costs in medium term

Without an active repo market, traders face higher funding risks, reducing their ability to make markets in corporate bonds.

Liquidity is sustained by funding markets. If repo regulation remains fragmented, secondary market liquidity will stay shallow, weakening bond market development.

6. Regulatory Fragmentation and Legislative Gaps

Corporate bonds and G-Secs are governed by multiple legislations:

Government Securities Act, 2006
RBI Act, 1934
Payment and Settlement Systems Act, 2007
SEBI Act
Depositories Act
Securities Contracts (Regulation) Act (SCRA)

The Securities Market Code (SMC) Bill, December 2025, consolidates:

SCRA
SEBI Act
Depositories Act

However, it does not harmonise provisions across RBI-related laws governing G-Secs and repo markets.

The article argues that true unification requires:

Amendments to the RBI Act
Consolidated oversight under a single regulator for corporate bond markets
Holistic legislative restructuring

Partial consolidation without addressing RBI–SEBI jurisdictional overlaps risks perpetuating fragmentation. Comprehensive reform is necessary for structural transformation.

7. Broader Governance and Economic Implications

Deepening the bond market has long been a policy objective in India. A unified bond market would:

Reduce dependence on banks for corporate financing
Improve monetary policy transmission
Enhance financial stability through diversified funding sources
Increase retail participation in sovereign debt
Strengthen India’s global financial market integration

From a GS-III perspective (Indian Economy), this reform relates to:

Financial sector reforms
Capital market deepening
Institutional coordination
Ease of doing business

From a GS-II perspective:

Regulatory architecture
Legislative reform
Institutional accountability

Without structural integration, India risks continued over-reliance on banking channels, limiting long-term infrastructure financing and corporate credit diversification.

8. Way Forward

Issue G-Secs in standard demat form
Integrate G-Secs fully into SEBI-regulated exchange trading
Develop G-Sec-based ETFs for retail investors
Harmonise trading, clearing, and settlement mechanisms
Bring repo in corporate bonds under a unified regulatory authority
Amend relevant laws including RBI Act and Government Securities Act
Strengthen the SMC Bill to include bond-market harmonisation

Conclusion

Unifying India’s bond market is not merely an administrative reform but a structural transformation of financial architecture. By integrating regulatory regimes, trading platforms, and settlement systems, India can enhance liquidity, improve pricing efficiency, expand retail participation, and lower the cost of capital. In the long run, a unified and deep bond market will be critical for sustaining high growth, financing infrastructure, and strengthening financial stability in a rapidly expanding economy.

Quick Q&A

Everything you need to know

The ‘unification of the bond market’ refers to harmonising the regulatory, trading, clearing, settlement, and holding frameworks for Government Securities (G-Secs) and corporate bonds under a single, coherent regime. At present, G-Secs are largely regulated and settled under the oversight of the Reserve Bank of India (RBI) through platforms such as NDS-OM and the Public Debt Office (PDO), whereas corporate bonds are regulated by Sebi and traded through stock exchanges and depositories. This dual structure has led to institutional fragmentation and operational inefficiencies.

Unification aims to create a single operating and demat structure where investors can hold both G-Secs and corporate bonds in the same account and trade them on the same platforms. Given that outstanding G-Secs (₹115 trillion as of December 2025) are nearly double the size of corporate bonds (₹58 trillion), integrating the two markets would enable seamless pricing transmission and improve liquidity. It would also reduce transaction costs and create economies of scale and scope.

From a reform perspective, unification is expected to enhance retail participation, deepen the corporate bond market, and align India’s debt markets with global best practices where sovereign and corporate bonds are traded within integrated market infrastructures.

The RBI’s 2021 scheme for direct retail participation through the Retail Direct platform and NDS-OM was a well-intentioned initiative to democratise access to G-Secs. However, it created a parallel system that required investors to open and operate a separate account with the Public Debt Office (PDO). This added procedural friction compared to the simplicity of holding securities in a standard demat account regulated by Sebi.

Unlike securities market depositories, which cover nearly 99% of India’s PIN codes, the PDO system lacks comparable outreach and integration with mainstream brokerage platforms. As a result, retail investors—who are accustomed to trading equities, ETFs, and corporate bonds through stock exchanges—have shown limited enthusiasm for a segregated infrastructure.

The core issue lies in market segmentation. Instead of integrating G-Secs into the broader securities ecosystem, the scheme reinforced institutional silos. A more effective strategy would be to issue G-Secs in demat form through stock exchanges and develop G-Sec-based ETFs, thereby leveraging the existing base of over 210 million demat holders.

The corporate bond market’s pricing is intrinsically linked to the sovereign yield curve, which is derived from G-Secs. However, when G-Secs and corporate bonds operate under separate regulatory and trading systems, the transmission of pricing information becomes less efficient. A unified regime would allow real-time integration of trading, clearing, and settlement, ensuring smoother yield curve formation and better benchmarking.

Further, integration would promote economies of scale and scope by consolidating trading platforms and clearing corporations. This would reduce operational duplication and enhance competition among intermediaries, ultimately narrowing bid-offer spreads and improving market depth.

An active and unified framework would also support a stronger repo market in corporate bonds. Market makers rely on repo financing to manage inventories and provide two-way quotes. When repo regulation is fragmented between Sebi (issuance and trading) and RBI (repo powers), liquidity suffers. A single regulator overseeing all aspects could significantly enhance liquidity and efficiency.

The argument for a single regulator rests on the principle of regulatory coherence. Currently, Sebi regulates issuance and trading of corporate bonds, while the RBI controls repo operations. This division can lead to coordination challenges, regulatory arbitrage, and slower policy responses. A unified regulator would streamline rule-making, reduce overlaps, and enhance accountability.

However, there are counterarguments. The RBI’s involvement stems from its mandate over monetary policy and systemic stability. Repo markets directly influence liquidity conditions in the banking system, which is central to RBI’s core functions. Removing RBI’s powers may dilute macroprudential oversight unless robust coordination mechanisms are instituted.

Thus, while regulatory consolidation may improve market efficiency, it must be accompanied by strong safeguards for systemic stability. Amendments to the RBI Act, Government Securities Act, and related laws would need to carefully balance efficiency with financial stability concerns.

If advising the government, I would recommend expanding the scope of the Securities Market Code (SMC) Bill beyond consolidation of the SCRA, Sebi Act, and Depositories Act. The Bill should holistically review and harmonise provisions in the Government Securities Act, 2006, the RBI Act, 1934, and the Payment and Settlement Systems Act, 2007 to eliminate structural fragmentation.

First, G-Secs should be mandatorily issued in demat form and traded through Sebi-regulated stock exchanges, while maintaining RBI’s role in public debt management. Second, repo regulation in corporate bonds should be aligned under a single authority to foster liquidity. Third, G-Sec-based ETFs should be incentivised to encourage retail participation.

Such reforms would deepen India’s debt market, improve capital allocation for infrastructure and private sector growth, and strengthen financial resilience. In the long run, a unified bond market would reduce dependence on bank financing and support India’s transition toward a more market-based financial system.