Total Return Swaps on Corporate Bonds Announced in Budget is a game-changer

A total return swap is a financial derivative contract between two parties: the "total return payer" (often the asset owner, like a bank) and the "total return receiver" (an investor).

A TRS on a corporate bond, the payer transfers the total economic performance of the bond—including interest payments, fees, and any capital gains or losses—to the receiver. In exchange, the receiver makes periodic payments based on a fixed or floating rate (e.g., based on benchmarks like SOFR plus a spread).

 

At the end of the swap's term, the receiver may also pay for any depreciation in the bond's value or receive compensation for appreciation.

 

Importantly, the receiver gains exposure to the bond's returns without actually owning or funding the asset outright, while the payer retains the bond on their balance sheet but transfers the associated risks.

 📌 Why This Proposal is Significant

This proposal means enabling such swaps in the domestic market to boost liquidity, allow synthetic exposure to corporate bonds, and facilitate better risk management tools like hedging credit and market risks.  Improved bond liquidity via swaps, easing secondary market trading and reducing holding costs

India's corporate bond market stood at approximately ₹53.6 trillion (about USD 640 billion) as of FY 2024-25, growing at a 12% CAGR from ₹17.5 trillion in FY 2014-15. NITI Aayog targets expansion to over ₹100 trillion by 2030 to fund infrastructure and business needs.

Who Benefits?

Introducing TRS on corporate bonds offers several advantages, benefiting various stakeholders in the financial ecosystem:

• Investors (e.g., hedge funds, institutional investors): They can gain leveraged exposure to corporate bonds without the need for full upfront capital or ownership, allowing for efficient portfolio diversification and higher potential returns with minimal cash outlay.

 

This is particularly useful for achieving large positions while managing operational costs and bypassing transfer restrictions.

• Banks and Financial Institutions (as TRS payers): They can transfer credit and market risks off their balance sheets synthetically, freeing up capital for other uses while still holding the assets. This helps in regulatory capital relief and hedging portfolios.

• Corporate Issuers: Deeper markets through TRS could lead to increased demand for bonds, encouraging more issuances (including by lower-rated entities), better pricing, and access to long-term funding at lower costs.

This supports sectors like infrastructure and MSMEs by channelling savings into productive areas. Overall, the TRS enhances liquidity, price discovery, and risk management tools (e.g., credit derivatives), making the bond market more resilient and attractive to foreign investors. ₹100 crore incentive for large muni bonds FM proposes a ₹100 crore incentive for a single municipal bond issuance exceeding ₹1,000 crore, while continuing the existing AMRIT incentive scheme for smaller/medium issuances (up to ₹100 crore).

Sectors likely to be impacted: Municipal finance, Bond market, Urban infrastructure, Construction & engineering, Public sector finance/NBFCs. 

In India, this could help close the long-term credit gap, boost economic growth toward "Viksit Bharat" goals, and reduce reliance on bank lending.