INDIA’S rupee-denominated corporate bond market lacks variety and has limited liquidity, with Indian corporates favouring the loan market over the bond market.
To deepen India's corporate bond market, the top individuals in research, sales and trading in India highlighted a diversification of instruments, index inclusion and further opening up of quota limits, as part of Asset Benchmark Research’s Asian Local Currency Bond Benchmark Review.
Despite government efforts to push corporates to tap the capital markets, the bulk of India’s corporate credit is still in the traditional loan markets. According to an Asia Securities Industry & Financial Markets Association (ASIFMA) report published in mid-2017, corporate debt accounts for roughly 15% of India’s GDP – which is lower than other Asian countries, such as China, South Korea, Thailand and Singapore. In Malaysia, for example, corporate debt stood at 45% as of December of last year.
Over the past four years, however, India’s banks have been plagued with record levels of non-performing loans putting pressure on bank balance sheets and profitability. Thus, for corporates with lower credit ratings there is increasing scope for issuing in the bond market rather than seeking expensive bank loans. The demand for corporate paper is also rising as mutual funds, the largest buyers of this paper, are increasing their assets under management.
Recent government reforms to reduce banks' loan exposure, relax restrictions on financial intermediaries to invest in lower-rated corporate bonds, and increase the participation of overseas investors are all well and good, but investors often complain about the lack of liquidity in India’s corporate bond market.
Sellside individuals covering Indian rupee bonds that were nominated in Asset Benchmark Research’s (ABR) annual Asian Local Currency Bond Benchmark Review were asked about how this market can be developed.
For Prasanna Ananthasubramanian, the chief economist at ICICI Securities Primary Dealership, diversification is the key. “The government needs to cut the fiscal deficit faster and also diversify sources of borrowing in terms of instruments, maturity buckets and investors,” he says. The current funding opportunities in Indian rupee corporate bonds are limited in terms of size and tenor.
For others global index inclusion and further relaxations in foreign portfolio investment limits will solve the problem encouraging long-term flows into the currency rather than hot money.
“We think listing Indian bonds in a global index, such as the JP Morgan EMBI, and opening further limits will deepen the corporate bond markets,” says Indranil Sengupta, co-head India research at Bank of America Merrill Lynch.
“Allowing investors greater freedom and flexibility by opening up of quota limits and index inclusion,” agrees Chaitanya Sampat an executive director in credit and investor sales at Standard Chartered.
The Reserve Bank of India (RBI) recently announced a change in the quota enabling foreign investors to increase their holdings of sovereign, state and corporate bonds. The RBI raised the limits for sovereign debt by half a percentage point, while changing how much investors can own of corporate bonds to 9% of outstanding notes from a previously fixed amount of US$51 billion (3.32 trillion rupee) equivalent.
These data are part of ABR’s Asian Local Currency Bond Benchmark Review 2018.
Methodology
The Asian Local Currency Bond Benchmark Review is conducted in the first quarter of the year. Over 300 local currency bond investors including asset managers, hedge funds, private banks, insurance funds and commercial banks from 11 Asian markets namely China, CNH, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand take part.
Data sets include market penetration, market share/wallet share, buying criteria/client satisfaction, research content and the top individuals. To learn more about the Asian Local Currency Bond Benchmark Review please click here.
All views quoted here are the individuals' own and not reflective of their company.
