Bond market: Luring retail investors
India needs a massive infrastructure buildout to realise its Viksit Bharat vision. Funding that buildout, in turn, requires a rebalancing of investment flows to achieve a well-rounded financial ecosystem, with a symbiotic relationship between the bond and equity markets, along with higher retail participation.Currently, retail investors in India, especially the middle class and corporate employees, are significantly more invested in equity markets compared with bond markets. The equity tilt exposes them to market volatility, such as those caused by the ongoing geopolitical and trade related uncertainties.To mitigate this risk, retail investors should be encouraged to diversify into fixed-income products through bond markets that face lower volatility in yields and offer benefits of fixed long-term returns.To be sure, returns on investments in infrastructure have been resilient to a large extent during periods of uncertainty. This makes bond market investments in targeted sectors such as infrastructure a promising avenue for retail investors. The experience of Brazil — also a developing economy — throws up some takeaways for promoting a culture of retail investments in bond market and, thereby, fuel infrastructure development.Brazil’s success storyBrazil has successfully channelled retail savings into the bond market by offering tax exemptions on ‘incentivised debentures’ that fund infrastructure projects.In 2011, Brazil introduced a framework for issuance of debentures that provided the retail investors with an exemption for interest and capital gain income from specific bonds targeted to finance infrastructure expenditure.Until 2016, the Brazilian Development Bank, BNDES (Banco Nacional de Desenvolvimento Econômico e Social), used to be the primary source of funding for infrastructure projects.Since then, however, with increasing familiarity, incentivised debentures have gained traction with retail investors, and more projects turned towards them to raise funds. Over the past 7-8 years, these debentures have grown to garner the majority share in funding private infrastructure projects in Brazil, much higher than disbursements by BNDES.Benefits for IndiaThis approach to offer tax benefits can be emulated in the Indian context. If a small portion of household savings is incrementally directed towards bond markets, it can bring a material change in the process of long-term nation-building.Our calculations show that if incremental savings equivalent to 10 per cent of retail systematic investment plan (SIP) inflow in equity mutual funds are channelled to the bond market, this can:* Increase gross domestic product (GDP) by 30-40 basis points (bps) over the next few years, assuming multiplier effect for infrastructure investments (using multiplier as quoted in Official Budget debate in Rajya Sabha);* Boost annual infrastructure investments by 2-3 per cent on the base of fiscal 2025.Per our analysis, the incremental tax revenue that can be generated over the next few years from additional GDP unlocked by infrastructure investments would be approximately 0.05 per cent of the GDP (fiscal 2025 base) assuming a tax to GDP ratio of around 12 per cent.That potential gain will significantly outweigh the upfront fiscal sacrifice of around 0.02 per cent of annual GDP, which represents the tax revenue forgone on the interest income being realised by retail investors over the lifespan of the infrastructure-targeted bonds.Notably, India has implemented policies involving upfront fiscal sacrifices for sustainable self-reliant economic growth in the past, such as the Production Linked Incentive (PLI) scheme.To encourage retail participation, the government could offer tax-free status to income on bonds that fund key target sectors such as infrastructure. This approach can provide an attractive fixed-income investment option to investors, while bringing in a diverse set of investors to bond markets.A well-developed bond market can also fuel private sector investments in infrastructure projects, complementing the government’s direct infrastructure investments and creating a multiplier effect on economic growth.Thus, by adapting Brazil’s success story to the Indian context, we can establish a more balanced and diversified financial ecosystem, better equipped to support India’s long-term vision of a Viksit Bharat.The writer is Managing Director, Crisil Ratings LtdPublished on May 19, 2026
