Purpose – This paper is a first attempt to empirically calibrate the default and asset correlation for large companies in India and elaborate its implications for credit risk capital estimation for a bank. Design/methodology/approach – The authors estimate default probabilities and default correlations of long-term bonds of 542 Indian corporates using rating transitions and pair-wise migrations over ten year cohorts of firms. Further, the implicit asset correlation from the estimated default correlations and default thresholds are derived using the asymptotic single risk factor approach. Findings – The authors find evidence that default correlations are time variant and vary across rating grades and industries. The highest correlations are observed between companies within the same rating grades (systematic risk impact) and within the same industry (industry specific impact). More interestingly, significantly smooth monotonic relationship between the probability of default (PD) and asset correlation as prescribed by the Basel II IRB document (2006) are not found. Moreover, it is found that the asset correlation range for Indian corporates do not match with what is prescribed for corporate exposures by BCBS. Originality/value – The authors address the dilemma implied by the negative relationship between PD and asset correlation as suggested by BCBS IRB formula and other research for developed economies with estimates of asset correlation for and emerging market like India and demonstrate its implications on the estimation of credit risk capital.