The Indian corporate bond market stands at a fascinating crossroads in 2025, where the age-old debate between over-the-counter (OTC) trading and exchange-based platforms has taken on new dimensions amid aggressive monetary policy easing and evolving market infrastructure. With the Reserve Bank of India having delivered a cumulative 100 basis points in repo rate cuts since February 2025, bringing the policy rate down to 5.50%, the dynamics of corporate bond trading have undergone significant transformations that demand a thorough examination of platform economics.
The magnitude of this monetary accommodation becomes clearer when we observe that the RBI surprised markets with a 50 basis point cut in June 2025, departing from the conventional 25 basis point increments seen in February and April. This aggressive easing cycle, combined with the central bank’s shift to a neutral policy stance from accommodative , has fundamentally altered the risk-return calculus for corporate bonds and, by extension, the economics of different trading platforms.
The Current Landscape: Scale and Structure
India’s corporate bond market has evolved into a formidable force, with outstanding volumes reaching approximately ₹53.6 trillion as of March 2025, representing nearly a threefold increase from ₹17.5 trillion in FY15. Despite this impressive growth trajectory, the market’s structural characteristics reveal a complex ecosystem where trading venue choice significantly impacts execution costs, liquidity provision, and price discovery mechanisms. The market’s size becomes even more striking when contextualized within the broader debt landscape. According to recent data, India’s total bond market stood at approximately ₹226.3 trillion as of December 2024, with corporate bonds accounting for ₹51.58 trillion of this total. This represents roughly 18% of India’s GDP, though still trailing developed markets where corporate bonds constitute over ~50-55% of GDP in the United States and around 85-90% in South Korea.
However, what makes the Indian corporate bond market particularly intriguing from a platform economics perspective is its institutional bias. More than 80% of bonds by volume are issued by entities rated AA or above , creating a concentration that fundamentally influences trading venue selection. This high-grade bias has profound implications for the OTC versus exchange trading debate, as different credit qualities often gravitate toward different trading mechanisms based on liquidity requirements and investor sophistication.
OTC Trading: The Dominant Paradigm
The over-the-counter market continues to dominate corporate bond trading in India, accounting for the vast majority of secondary market transactions. This dominance stems from several structural factors that make OTC trading particularly suited to the Indian context. The bilateral nature of OTC transactions allows for significant customization in deal structures, which becomes crucial when dealing with the diverse range of corporate issuers and their varying credit profiles. One of the most compelling advantages of OTC trading lies in its ability to accommodate large block transactions without significant market impact. Given that average bond trade sizes in global markets typically range between €1-2 million, with trades of €100 million not uncommon before the 2008 crisis , the OTC model’s capacity to handle substantial volumes becomes particularly relevant for institutional investors who dominate the Indian corporate bond landscape.
The opacity inherent in OTC trading, often criticized as a weakness, actually serves specific economic functions. It allows financial institutions to unwind or establish positions without revealing their trading intentions to the broader market, which can be particularly valuable during periods of market stress or when executing complex hedging strategies. This confidentiality premium has real economic value, as institutions are often willing to accept slightly wider bid-ask spreads in exchange for execution privacy. Recent data from the Clearing Corporation of India Limited (CCIL) reveals the tangible costs of this privacy premium. For liquid securities, bid-ask spreads averaged 0.0416% in August 2025, while semi-liquid securities commanded spreads of 0.1922%, and illiquid securities reached 0.4855%. These spreads represent the economic rent extracted by market makers for providing immediacy and confidentiality in OTC transactions.
Exchange Trading: The Efficiency Frontier
Exchange-based trading platforms, primarily through the NSE’s corporate bond segment and the emerging ecosystem of electronic trading platforms, offer a markedly different value proposition. The anonymous, order-driven nature of exchange trading eliminates many of the search costs associated with OTC transactions, potentially leading to tighter bid-ask spreads and improved price discovery.
The introduction of the Negotiated Dealing System-Order Matching (NDS-OM) platform transformed government securities trading and provided valuable insights into the potential for exchange-based corporate bond trading. Research indicates that while the launch of NDS-OM was associated with reduced trading likelihood for individual bonds, it significantly increased trading volumes conditional on trading occurring. This seemingly paradoxical result suggests that exchange platforms concentrate liquidity in a smaller number of actively traded securities, potentially improving execution quality for those instruments.
The economic advantages of exchange trading become particularly pronounced for standardized, frequently traded instruments. The automated matching algorithms eliminate the need for bilateral price negotiation, reducing transaction costs and improving execution speed. Moreover, the transparency inherent in exchange trading – with real-time order book information and trade reporting – contributes to more efficient price discovery mechanisms.
However, the migration from OTC to exchange trading faces significant path dependency challenges. Market participants who have invested heavily in OTC infrastructure and relationships may resist switching to exchange platforms, even when such a switch would be socially optimal. This resistance is particularly strong among intermediaries who might see their role diminished in a more transparent, exchange-based ecosystem.
The Economics of Liquidity Provision
The fundamental economics of liquidity provision differ markedly between OTC and exchange-based platforms, creating distinct cost structures that influence trading venue selection. In OTC markets, liquidity is provided by dealer-intermediaries who maintain inventory positions and earn revenue through bid-ask spreads. These dealers must be compensated for the capital they deploy, the inventory risk they assume, and the operational infrastructure they maintain. The inventory risk component becomes particularly significant during periods of market volatility. When RBI policy uncertainty was high, as during the transition from accommodative to neutral stance , OTC dealers required wider spreads to compensate for the increased holding period risk of bond positions. This dynamic creates a procyclical pattern where liquidity provision becomes more expensive precisely when it is most needed.
Exchange-based platforms, by contrast, rely on a different liquidity provision model. Rather than dealers holding inventory, exchanges facilitate trading between natural buyers and sellers, with market makers providing quotes but not necessarily holding large positions. This model can be more capital efficient, but it requires a critical mass of diverse participants to function effectively. The challenge facing Indian corporate bond markets is achieving this critical mass. Despite regulatory reforms aimed at broadening participation, the market remains dominated by institutional investors such as mutual funds, insurance companies, and pension funds. These institutions typically exhibit buy-and-hold behaviour, limiting the natural order flow that exchanges require for efficient price discovery.
Retail Participation: A Game-Changing Dynamic
One of the most significant developments reshaping corporate bond platform economics has been SEBI’s aggressive push to democratize retail access. The reduction of minimum face value for privately placed corporate bonds from ₹1 lakh to ₹10,000 in May 2024 represents a fundamental shift that could alter the OTC versus exchange trading balance.
Retail investors, unlike their institutional counterparts, typically require the transparency and standardization that exchange platforms provide. They lack the sophisticated risk management systems and relationship networks that make OTC trading viable for large institutions. As retail participation increases from the current 4% levels , the economics of platform choice may tilt toward exchange-based solutions.
The emergence of Online Bond Platform Providers (OBPPs) like Altifi represents an interesting hybrid model that combines retail accessibility with institutional-grade execution. Altifi’s model is particularly noteworthy because it addresses several structural challenges in corporate bond trading. By offering fixed-income investments with returns of up to 13.50% per annum and maintaining zero charges for purchases , the platform demonstrates how technology can reduce the economic barriers that have traditionally favoured OTC trading for smaller transactions.
The regulatory framework governing OBPPs ensures that all orders are routed through the Request for Quote (RFQ) platform of recognized stock exchanges, with settlement occurring through exchange mechanisms. This hybrid approach preserves the efficiency benefits of exchange trading while providing the accessibility that retail investors require.
The Role of Technology and Infrastructure
The economics of platform choice are increasingly influenced by technological capabilities and infrastructure investments. Exchange-based platforms benefit from economies of scale in technology deployment, with automated systems capable of handling large volumes of standardized transactions at relatively low marginal cost. The Corporate Bond Reporting and Integrated Clearing System (CBRICS) and similar platforms have standardized trade reporting requirements, mandating that all corporate bond trades be reported within 15 minutes of execution regardless of venue. This standardization reduces the operational advantages that OTC platforms historically enjoyed through flexible reporting protocols.
Settlement infrastructure also plays a crucial role in platform economics. The move to T+1 settlement cycles and the Delivery versus Payment (DvP) system has standardized settlement processes across platforms. However, exchange-based platforms often provide additional operational efficiencies through automated clearing and settlement processes that reduce back-office costs for market participants. The integration of artificial intelligence and machine learning in pricing algorithms represents another technological frontier where exchange platforms may enjoy advantages. These systems can process large volumes of market data in real-time to provide more accurate pricing, potentially reducing the information asymmetries that have traditionally favored OTC trading.
Foreign Investment and Platform Dynamics
The surge in foreign portfolio investment in Indian corporate bonds has introduced new dynamics to the platform economics debate. Foreign investment reached ₹20,996 crore in May 2025, the highest monthly inflow in a decade , driven partly by regulatory reforms that relaxed certain tenor and issuer caps for corporate debt investments for foreign portfolio investors.
Foreign investors often prefer the transparency and standardization of exchange-based platforms, particularly when investing in unfamiliar markets. The anonymous nature of exchange trading can also be attractive to foreign investors who may not have established relationships with local dealers. However, the large transaction sizes typical of foreign institutional investment may require the block trading capabilities that OTC platforms provide.
The RBI’s removal of investment restrictions for foreign portfolio investors in corporate debt securities has effectively removed one of the regulatory barriers that previously channeled foreign investment toward specific platforms. This regulatory neutrality allows platform choice to be driven more by economic considerations rather than compliance requirements.
Conclusion: The Evolving Balance
The OTC versus exchange trading battle in Indian corporate bond markets is not a zero-sum game but rather an evolution toward a more diverse and efficient ecosystem. Each platform model serves distinct economic functions and participant needs, with the optimal balance continuing to evolve as market structure, regulation, and participant behaviour change. The aggressive RBI rate cuts of 2025 have created a more favourable environment for corporate bond investment across all platforms, with lower rates improving the relative attractiveness of fixed-income securities. However, the long-term structural evolution of the market will likely depend more on factors such as retail participation growth, technological advancement, and regulatory framework development than on monetary policy cycles.
The emergence of hybrid models, exemplified by platforms like Altifi that combine retail accessibility with institutional-grade execution, suggests that the future may belong not to pure OTC or pure exchange models but to platforms that can effectively combine the advantages of both approaches. These hybrid platforms can provide the transparency and accessibility that retail investors require while maintaining the flexibility and customization capabilities that institutional investors value. As the Indian corporate bond market continues its journey toward greater depth and sophistication, the platform economics will undoubtedly continue evolving. The ultimate winners will be those platforms that can most effectively balance the competing demands of transparency and flexibility, standardization and customization, and efficiency and relationship value. In this context, the OTC versus exchange trading battle is less about one model defeating the other and more about how different platform models can coevolve to serve an increasingly diverse and sophisticated market ecosystem.
The trajectory of this evolution will have profound implications not just for market participants but for India’s broader financial development goals. A more efficient and liquid corporate bond market, enabled by optimal platform economics, will play a crucial role in supporting the country’s infrastructure investment needs and reducing its traditional dependence on bank financing. The ongoing platform evolution is thus not merely a technical market structure issue but a fundamental component of India’s financial system development strategy.
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