India rolls out bond market reforms
India has unveiled fresh incentives to spur municipal bonds and deepen the corporate bond market, while proposing to set up a risk guarantee fund to support infrastructure lending.
In her budget speech on February 1, finance minister Nirmala Sitharaman said cities that issue a single municipal bond of more than Rs10bn (US$109m) will receive an incentive of Rs1bn to encourage larger deals.
The push for larger municipal bonds signals an “intent to make urban infrastructure finance institutional and investible”, said Pratik Shah, national financial services leader at EY India in a note.
“This scale is essential to attract long-term investors and build credible price discovery in municipal debt.”
The news is expected to accelerate plans by issuers such as Navi Mumbai Municipal Corp, which has been preparing a maiden Rs10bn bond issue since September, DCM bankers said.
Other municipal corporations – Brihanmumbai Municipal Corp, Bangalore Municipal Corp, Greater Hyderabad Municipal Corp and Greater Chennai Municipal Corp – are expected to explore large deal sizes following the announcement, bankers said.
"There are large urban local bodies, cities like Mumbai and Pune, which are capable of raising Rs10bn so that they can invest in large projects," said Rajkiran Rai, managing director at National Bank for Financing Infrastructure and Development.
So far, municipal corporations have raised only up to around Rs2.5bn from each deal after the government in 2022 introduced an incentive of Rs130m per Rs1bn of face value for debut municipal issuers, up to a cap of Rs260m.
Marketmaking framework
Separately, Sitharaman said that India will "introduce a marketmaking framework with suitable access to funds and derivatives on corporate bond indices" and "propose to introduce total return swaps on corporate bonds".
Regulators are looking to engage with stakeholders to implement the proposals.
"The marketmaking framework will support continuous two-way quotes, reduce bid-ask spreads, and improve price discovery," making corporate bonds a "cheaper funding route for issuers", said Tuhin Kanta Pandey, chairman of the Securities and Exchange Board of India, at a bond market event in Mumbai.
The measures aim to boost liquidity and broaden investor participation in corporate bonds.
Foreign portfolio investors have been accessing the domestic bond market through total return swap instruments being provided by global banks in the offshore hub of Gujarat International Finance Tec-City (GIFT City).
TRS gives investors full economic exposure to a bond, that is coupon and price movement, without holding the underlying security.
Onshore usage has so far been limited to just a handful of institutions, prompting the government to move towards formalising the product, bankers said.
"This will allow leverage play in the corporate bond market, specifically benefiting investors like nonbanking financial companies, insurance companies, private credit funds, and family offices," said a head of a private credit fund.
Focus on infrastructure
To buttress infrastructure financing, India will establish an Infrastructure Risk Guarantee Fund "to provide prudently calibrated partial credit guarantees to lenders”, Sitharaman said.
This is intended to boost private developers’ confidence in managing construction-phase risks.
"The Infrastructure Risk Guarantee Fund to ease financing bottlenecks and revive stalled projects would provide much needed relief for funding of projects which have faced delays and cost overruns on account of reasons beyond control or systemic issues," said Dibyanshu Sinha, partner at law firm Khaitan & Co, in a note.
The move builds on last year’s budget push to expand credit‑enhancement tools for infrastructure projects.
In September, NaBFID launched a partial credit‑enhancement facility aimed at helping lower‑rated infrastructure issuers access the domestic bond market.
Rai said the bank is looking to execute its first PCE transaction in the quarter ending March.
Meanwhile, GuarantCo has made inroads in India and aims to deploy around Rs27bn in guarantees over the next two to three years, IFR reported in December.
GuarantCo is the credit guarantee arm of the Private Infrastructure Development Group and is funded by the UK, Switzerland, Australia, Sweden, the Netherlands, Canada and France.
The new measures are expected to reduce borrowing costs and attract long-term institutional capital. "It will expand the investor pool and make infrastructure funding more market driven. Success will hinge on how well the Risk Guarantee Fund is priced and managed, and how transparent the credit enhancement for bonds is," a DCM banker said.
The push for infrastructure comes as the government will spend Rs12.2trn on capital expenditure in the financial year beginning on April 1, an 8.9% year-on-year increase from Rs11.2trn.
Record gross market borrowings
While the fiscal deficit is projected at 4.3% of GDP for the next financial year beginning on April 1, down slightly from the 4.4% budgeted in the current year, gross market borrowings are set to hit an all-time high of Rs17.2trn, compared to Rs14.8trn in the year ending on March 31.
This is above market expectations of Rs16.5trn and adds to concerns over elevated supply from central and state governments, potentially weighing on domestic yields, according to most economists.
"The higher gross government borrowing along with higher expected bond supply from states will continue to put upward pressure on corporate bond yields," said Venkatakrishnan Srinivasan, founder of financial services firm Rockfort Fincap.
India's 10-year AAA PSU (public sector undertaking) benchmark climbed 5bp on February 2, a day after the budget, but softened by 9bp during the week after the US said it would cut tariffs on India from 50% to 18%.
The government has also extended the tax holiday to 20 years from 10 years on business income earned for all units in GIFT City. A 15% tax rate will apply once the tax holiday expires.