Liquidity Challenges in Indian Corporate Bond Markets: Strategies for Retail Investors

The Indian corporate bond market presents a fascinating paradox that befuddles even seasoned investors: whilst the market has grown exponentially to ₹53.6 trillion in outstanding securities as of March 2025, it remains stubbornly illiquid, particularly for retail investors seeking to exit their positions before maturity. This liquidity conundrum represents one of the most significant barriers preventing broader retail participation in what should be a cornerstone asset class for portfolio diversification and steady income generation. The challenge is not merely academic—it has real-world implications for millions of Indians seeking alternatives to traditional bank deposits and looking to participate in the country's economic growth through fixed-income instruments.

The numbers paint a stark picture of the market's liquidity constraints. Despite record-breaking primary issuances of ₹9.9 trillion during FY25, the secondary market remains anaemic, with average daily turnover rising modestly to ₹7,645 crores from ₹5,722 crores in the previous year. To contextualise this figure, the corporate bond market's daily turnover represents merely a fraction of the ₹50,000-70,000 crores traded daily in government securities, highlighting the vast disparity in liquidity between these two debt segments. More tellingly, the average monthly turnover stands at just 3.8% of outstanding value, indicating that most bonds are held to maturity rather than actively traded.

This liquidity challenge is not merely a statistical curiosity but a fundamental structural issue that affects every retail investor contemplating corporate bonds as an investment option. The dominance of private placements—accounting for 99.2% of total issuances—creates a market where bonds are distributed primarily to institutional investors who adopt buy-and-hold strategies, leaving precious little paper available for secondary market trading. The result is a market that functions more like a collection of bilateral lending arrangements than a vibrant trading ecosystem, creating significant challenges for retail investors who may need to exit their positions due to changing financial circumstances or better investment opportunities.

Understanding the Structural Roots of Liquidity Constraints

The liquidity challenges plaguing India's corporate bond market stem from a confluence of structural factors that have created a self-reinforcing cycle of illiquidity. At the heart of this challenge lies the overwhelming preference for private placements over public issuances, a trend that has only intensified over the past decade. Public issuance of corporate bonds has declined precipitously from 12% of total issuances in 2014 to a mere 0.8% in 2024, with private placements raising approximately ₹8.38 lakh crores compared to just ₹19,000 crores through public routes in FY24.

This private placement dominance creates several interconnected problems for liquidity. Firstly, it concentrates bond ownership among a handful of large institutional investors primarily insurance companies, mutual funds, and banks who have both the regulatory mandate and financial incentive to hold bonds until maturity. Insurance companies, constrained by regulatory requirements to match their long-term liabilities, rarely trade their bond holdings, whilst pension funds similarly adopt buy-and-hold strategies that effectively remove securities from active circulation. The result is a market where approximately 85% of bond holders follow buy-and-hold strategies, dramatically reducing the floating supply available for secondary trading.

The concentration of issuers further exacerbates liquidity constraints. Central Public Sector Undertakings (CPSUs) account for over 25% of gross bond issuance over the past five years, whilst more than 80% of bonds by volume are issued by entities rated AA or higher. This concentration in highly-rated, quasi-sovereign issuers creates a narrow universe of available securities, limiting diversification opportunities and creating artificial scarcity for retail investors seeking exposure to different credit profiles and yield segments.

The Retail Investor's Liquidity Dilemma

For retail investors, the liquidity challenges in corporate bond markets manifest in several concrete ways that can significantly impact investment returns and portfolio management flexibility. The most immediate challenge is the bid-ask spread, which represents the difference between the price at which investors can buy and sell bonds. Whilst AAA-rated bonds typically exhibit spreads of around 15 basis points, this widens dramatically to 40-60 basis points for BBB-rated securities. For a retail investor holding a ₹1 lakh bond position, these spreads can translate to immediate losses of ₹150-600 simply from the act of buying and selling, before considering any underlying price movements.

The challenge becomes more acute when considering the operational complexities of selling bonds before maturity. Unlike equity investments where selling involves a simple online transaction, bond sales often require filling out Delivery Instruction Slips (DIS) and navigating a cumbersome process that can take several days to complete. This operational friction not only delays access to funds but also exposes investors to additional market risk during the settlement period, particularly problematic in volatile interest rate environments where bond prices can fluctuate significantly.

Transaction costs further erode the attractiveness of secondary market trading for retail investors. Beyond the bid-ask spreads, investors face brokerage fees, GST, stamp duty, and SEBI charges that collectively can consume 0.5-1% of transaction value. For smaller retail positions, these costs can quickly eliminate any potential gains from tactical trading or portfolio rebalancing, effectively locking investors into buy-and-hold strategies regardless of their initial intentions.

The lack of transparent pricing compounds these challenges, as retail investors often struggle to determine fair values for their bond holdings. Unlike equity markets where continuous trading provides real-time price discovery, corporate bonds may trade infrequently, leaving investors reliant on indicative quotes that may not reflect actual market conditions. This pricing opacity can lead to situations where investors accept unfavourable prices simply due to information asymmetries, particularly disadvantaging those without access to institutional-grade research and analytics.

Platform Solutions and Digital Innovation

The emergence of Online Bond Platform Providers (OBPPs) represents perhaps the most significant development in addressing liquidity challenges for retail investors. These SEBI-regulated platforms have introduced technology-driven solutions that aggregate liquidity, improve price transparency, and streamline the trading process in ways that were previously unavailable to individual investors. By creating centralised marketplaces where multiple dealers can compete for retail order flow, OBPPs have begun to narrow bid-ask spreads and improve execution quality for smaller transactions.

The regulatory framework governing OBPPs, established in November 2022, has created a structured approach to retail bond market access that balances innovation with investor protection. These platforms must register as stockbrokers in the debt segment, maintain minimum net worth requirements, and adhere to strict disclosure standards that enhance transparency for retail participants. The framework also mandates that OBPPs provide comprehensive information about bond characteristics, credit ratings, and associated risks, helping level the informational playing field between retail and institutional investors.

Leading platforms have implemented several innovations specifically designed to address liquidity constraints. Real-time pricing engines aggregate quotes from multiple dealers, providing retail investors with competitive pricing that approaches institutional execution quality. Automated portfolio management tools help investors track their holdings and identify optimal timing for potential sales based on interest rate cycles and credit developments. Educational resources and research capabilities enable retail investors to make more informed decisions about when to hold versus sell their positions.

Altifi, backed by Northern Arc Capital, exemplifies how specialised platforms are addressing liquidity challenges through targeted solutions for retail and HNI investors. With over 58,979 registered users and ₹12.20 billion in facilitated investments, Altifi has demonstrated the potential for technology-enabled platforms to build meaningful scale in the retail bond market. The platform's focus on curated, high-quality debt securities with yields ranging from 9% to 15% per annum provides investors with transparent access to previously institutional-only opportunities. Importantly, Altifi's zero-commission structure for purchases removes one layer of transaction costs that traditionally discouraged retail participation, whilst its mobile-friendly interface and automated processes reduce the operational friction that has historically plagued bond trading. The platform's integration with broader financial market infrastructure ensures institutional-standard settlement and custody whilst maintaining the user experience simplicity that retail investors require.

However, it's crucial to understand that whilst digital platforms can improve access and reduce transaction costs, they cannot eliminate the fundamental liquidity constraints that characterise the underlying market. The success of these platforms ultimately depends on their ability to aggregate order flow and create network effects that enhance liquidity for all participants.

Strategic Approaches to Liquidity Management

Given the structural liquidity constraints in India's corporate bond market, retail investors must adopt sophisticated strategies that acknowledge these limitations whilst maximising the benefits of fixed-income investing. The most fundamental approach involves aligning investment horizons with bond maturities, effectively converting the liquidity challenge into a non-issue by planning to hold bonds until redemption. This strategy requires careful cash flow planning and disciplined portfolio construction but eliminates the need to rely on secondary market liquidity for investment success.

Maturity laddering represents another effective approach to managing liquidity risk whilst maintaining steady income generation. By spreading investments across bonds with different maturity dates—for example, purchasing bonds maturing in 1, 2, 3, 4, and 5 years—investors create natural liquidity events as bonds mature and principal is returned. This approach provides regular opportunities to reassess market conditions and reinvest proceeds at prevailing rates whilst reducing the portfolio's average duration and interest rate sensitivity.

Credit quality management becomes particularly important in illiquid markets, as lower-rated bonds typically exhibit even wider bid-ask spreads and longer settlement times. Retail investors should generally focus on highly-rated securities (AAA to AA-) not only for credit safety but also because these bonds typically maintain better secondary market liquidity when trading is necessary. The additional yield pickup from lower-rated bonds rarely compensates for the liquidity premium required to exit such positions in stressed market conditions.

Position sizing requires careful consideration of both individual risk tolerance and overall portfolio liquidity needs. As a general guideline, retail investors should limit individual bond positions to 5-10% of total investment portfolio and ensure that no single issuer represents more than 15% of bond holdings. This diversification not only reduces credit concentration risk but also provides flexibility to sell specific positions if attractive opportunities arise elsewhere.

Maintaining a liquidity buffer outside of bond investments becomes crucial for investors who choose to allocate significant portions of their portfolios to corporate bonds. A reserve of 10-20% of total investable assets in highly liquid instruments—such as short-term government securities, high-quality money market funds, or bank deposits—ensures that temporary cash needs can be met without forcing disadvantageous bond sales.

Interest Rate Cycle Considerations

The interaction between interest rate cycles and bond market liquidity creates additional complexity for retail investors that requires careful consideration in portfolio planning. During periods of rising interest rates, bond prices decline, but liquidity often deteriorates further as investors become reluctant to realise losses, creating a positive feedback loop that can trap retail investors in declining positions. Conversely, falling rate environments typically improve both bond prices and liquidity as investors become more willing to trade and take profits.

Understanding these cyclical patterns can inform both entry and exit timing decisions. Retail investors might consider building bond positions during periods of higher interest rates when yields are attractive and liquidity is typically better due to new issuance activity. Similarly, periods of declining rates might present opportunities to realise gains on existing positions, though investors must weigh the benefits of profit-taking against the challenge of reinvesting proceeds at lower yields.

Duration management becomes particularly important in illiquid markets, as longer-duration bonds exhibit greater price volatility and typically face more significant liquidity constraints. Retail investors should carefully consider their ability to withstand mark-to-market volatility and potential early exit needs when selecting bond durations. Shorter-duration bonds (1-3 years) generally offer better liquidity profiles whilst still providing yield advantages over savings accounts and short-term deposits.

Conclusion: Navigating Liquidity Challenges with Realistic Expectations

The liquidity challenges in India's corporate bond market represent fundamental structural issues that cannot be eliminated through individual investor strategies alone. However, retail investors who understand these constraints and plan accordingly can still benefit significantly from corporate bond investing whilst managing liquidity risk effectively. The key lies in aligning investment strategies with market realities rather than expecting corporate bonds to provide equity-like liquidity.

The emergence of digital platforms like Altifi and the evolving regulatory framework suggest that conditions for retail investors are gradually improving, though significant challenges remain. Successful bond investing for retail participants requires a combination of careful planning, appropriate diversification, and realistic expectations about liquidity constraints.

As India's corporate bond market continues to mature and evolve, the combination of regulatory support, technological innovation, and growing market participation may gradually improve liquidity conditions. However, retail investors should build their strategies around current market realities whilst remaining positioned to benefit from future improvements. The rewards of corporate bond investing—steady income, capital preservation, and portfolio diversification—remain attractive for patient investors who understand and plan for the market's liquidity constraints.

Ultimately, the corporate bond market's liquidity challenges need not preclude retail participation but should inform more thoughtful, strategic approaches to fixed-income investing. By acknowledging these constraints and building appropriate strategies around them, retail investors can harness the benefits of corporate bonds whilst avoiding the pitfalls that trap unprepared participants. The evolving landscape of digital platforms, regulatory reforms, and market development suggests that conditions will continue improving, making this an opportune time for retail investors to develop the knowledge and strategies necessary for successful bond market participation.