Global investors flock to Indian fixed income

Category: Asia, Singapore, Global

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Praveen Jagwani, CFA, CEO, and Viral Bhuta, fixed income portfolio manager – both from UTI International (Singapore) Pte Ltd – tell Asia Asset Management why the Indian bond market is thriving.

Asia Asset Management: How is faster growth through reforms and market liberalisation under Prime Minister Narendra Modi’s new government likely to affect the Indian fixed income market?

Praveen Jagwani and Viral Bhuta: It is widely expected that Mr. Modi will replicate the success of his home state of Gujarat on the broader national level. India needs a tremendous amount of funding to achieve its growth ambition and the Modi government has already started easing regulation to open up India’s economy to foreign investments. As per India’s planning commission, there is a likely funding gap of about US$83 billion for the debt component of financing the current five-year plan. The growth of the bond markets in India will be a case of natural evolution that will help raise capital, while supporting the government’s budget and releasing bank capital. Foreign investors have pumped in an astonishing US$11.9 billion into equities and US$14.25 billion into debt markets (as of August 1, 2014). The fiscal budget brought relief as the government targeted to bring down the deficit to 4.1% in FY15 and fixed income markets rose on the promise of fiscal prudence. Thus, fiscal consolidation and investment-orientated reform will create a wider and deeper debt market.

With a revision of the interest rate environment in the US imminent, what will this mean for Indian fixed income?

Not just the United States but also most of the developed world is preparing for a rate hike. India, on the other hand, is at the peak of its interest rate cycle and preparing for rate cuts. This counter-cyclicality of Indian markets makes it very attractive to investors. Global investors are still hunting for yield and India’s yield at 8.5% is one of the highest among investment grade countries, in local currency terms. As global growth resumes, risk appetite is bound to increase and demand for emerging markets’ assets will only increase. Historical data shows that Indian currency, equity markets and debt markets have done well when global risk appetite is on the rise. Faced by the enormous demand for Indian fixed income, the Indian government recently increased the quantum of government bonds permissible for purchase by foreign investors by US$5 billion to US$25 billion. Thus, as India grows, the debt markets will steadily open up to foreign investment.

Do you think a gradual opening up of the Indian debt markets could also expand the avenues available for funding private sector investment?

Historically, India’s equity markets have been more easily accessible for global investors. As a consequence, its equity markets, to a certain degree, move in synchronicity with global movements. The debt markets, on the other hand, have been somewhat insulated by regulation. The widening of Indian debt markets will increase avenues for private sector investments. In the next three- to-five years, private sector investments may represent half of the US$1 trillion needed for infrastructure projects in the India. Global corporates are significant players in building the country’s core infrastructure and thus, the availability of such long-term funds is essential for the execution of such projects. The government has established a Public Private Partnership (PPP) model for infrastructure projects with concession arrangements aimed at delivering an appealing Return on Equity for investors.

Where is most of the growth coming from, in the Indian fixed income market?

In most developed countries, the bond market is bigger than the market capitalisation of domestic equity markets but it’s the reverse in India; India’s equity market is around US$1.4 trillion in capitalisation and the debt market is roughly 60% of that. Thus, debt markets will have to play some serious catch-up, not just in terms of volume but also in terms of product sophistication. As regulations change, the investment banks in India are waiting in the wings with progressive new products and ways of structuring and parcelling risk. Corporates have traditionally relied on loans from Indian banks to raise resources and that has led to banks with extended balance sheets in capital intensive projects with long payback periods. We expect that at some stage, with the advent of securitisation, a greater number of domestic and foreign investors will be able to find investment opportunities that match their risk profile. The 2014 budget has already proposed the clearing of local currency debt securities through Euroclear, for example, and we anticipate two options:

  1. Listing of Indian government bonds in an emerging markets’ bond index – there has already been talk of listing on the JPM GBI-EM Index. This move could raise US$20-25 billion for India, with a 10% allocation.
  2. Issuing hard currency sovereign bonds like most other countries to fund long-term infrastructure projects in the country.