India's Corporate Bond Market Liquidity and Risk-Adjusted Returns: A Deep Dive into Cholamandalam's 5-Year Bond Issuance

India's corporate bond market has emerged as a cornerstone of the country's financial ecosystem, with total fundraising nearing ₹10 trillion in 2025-a testament to historically low interest rates, abundant liquidity, and surging corporate capital expenditure, according to The Economic Times. Yet, beneath this impressive growth lies a critical challenge: secondary market liquidity remains shallow, with average monthly turnover hovering below 4% of outstanding volumes, as highlighted in a GoldenPi report. This structural imbalance raises questions about the market's ability to deliver risk-adjusted returns for investors, particularly as issuers like Cholamandalam Investment and Finance Company (CHOLAFIN) test the waters with high-yield offerings.

The Liquidity Conundrum in India's Corporate Bond Market

India's corporate bond market, valued at ₹51.58 trillion as of December 2024, is dominated by institutional investors, who hold over 95% of outstanding bonds, according to a Jiraaf analysis. Retail participation remains negligible due to high minimum investment thresholds and opaque pricing mechanisms, as noted by The Economic Times. This concentration of holdings has fostered a "buy-and-hold" culture, with private placements accounting for a significant share of issuance. The result? A market where primary fundraising thrives but secondary trading languishes.

Liquidity metrics underscore this divide. According to CCIL data, bid-ask spreads for liquid securities averaged 0.0292% in July 2025, while semi-liquid and illiquid securities saw spreads of 0.1585% and 0.2476%, respectively. These wider spreads for less liquid bonds amplify transaction costs, deterring smaller investors and reducing the market's efficiency. Market depth-the volume available at different price levels-also remains constrained, limiting the ability to trade large blocks without price slippage, as a FasterCapital analysis notes.

Cholamandalam's 5-Year Bond: A Case Study in Investor Appetite

Against this backdrop, Cholamandalam's recent 5-year bond issuance offers a compelling case study. On October 13, 2025, the company accepted bids for a ₹4 billion offering with a 7.58% coupon rate, part of a larger ₹1,000 crore secured non-convertible debenture (NCD) program maturing in October 2030, according to a Reuters report. The issuance, rated AA+ by ICRA on Cholamandalam's credit rating page with a positive outlook, attracted robust demand, reflecting investor confidence in the company's credit profile and the allure of yields in a low-interest-rate environment.

This offering is significant for two reasons. First, it demonstrates that high-quality issuers can still command strong investor interest despite the market's liquidity challenges. Second, the 7.58% coupon, while attractive, must be weighed against the risk of limited secondary market liquidity. For fixed-income investors, the trade-off between yield and liquidity becomes critical: higher yields may compensate for illiquidity, but only if the risk premium is adequately priced.

Implications for Risk-Adjusted Returns

The Cholamandalam issuance highlights a broader tension in India's corporate bond market. While the RBI's cumulative 100 basis points of rate cuts in 2025 have spurred primary issuance, secondary market activity has not kept pace, as reported by Business Standard. For investors, this means that even high-rated bonds may carry hidden liquidity risks. A bond's risk-adjusted return is not solely a function of its credit rating or coupon rate but also its tradability.

Consider the bid-ask spreads for semi-liquid and illiquid securities: a 0.1585% spread on a ₹4 billion bond translates to transaction costs of approximately ₹6.34 million, as shown in CCIL data. For institutional investors with large portfolios, these costs can erode returns. Conversely, the robust demand for Cholamandalam's bonds suggests that investors are willing to accept these risks in exchange for yields that outpace government securities.

The Path Forward: Reforms and Opportunities

To enhance liquidity and broaden participation, policymakers have proposed reforms such as lowering issuance thresholds, simplifying investment norms for retail investors, and improving tax treatment for debt mutual funds, measures suggested by The Economic Times. These measures could catalyze a shift from a "buy-and-hold" model to a more dynamic trading environment. For now, however, investors must navigate a market where primary issuance optimism coexists with secondary market fragility.

Cholamandalam's bond issuance serves as a microcosm of this duality. While the company's strong credit rating and competitive coupon rate attracted demand, the broader market's liquidity constraints remain a hurdle. For fixed-income investors, the lesson is clear: in a market where secondary trading is limited, due diligence must extend beyond credit metrics to include liquidity risk.

Source

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