Determinants of corporate credit spread: evidence from India

Abstract

Understanding the behavior of corporate credit spread is of paramount importance to understand and manage risk in fixed income securities. This study examines the determinants of corporate credit spread in Indian bond market. By adopting a panel data approach, the study estimates a fixed-effects regression equation to analyze the determinants of corporate credit spread in Indian bond market. The variables used in the study are motivated from structural models and macroeconomic variables and include interest rate variables, stock market variables, inflation and economic growth. The study found that the interest rate variables, stock market variables and inflation are the key variables in explaining the level of corporate credit spread in Indian bond market. The results are robust to the traditional approach of using aggregate yield spread for the whole sample and also when the sample was divided using different industrial classification. Overall, the study highlights the importance of stable interest rate and inflationary environment for the development of Indian corporate bond market.