From one of the ‘fragile five’ a few short years ago, India has become a standout among the world’s emerging markets. Equities are up handsomely this year, the currency has stabilised, and foreign investors are circling.
Much of this is down to policy measures – both at the government and the central bank. Narendra Modi’s reformist agenda has stirred interest in renewable energy and accelerated the liberalisation of the currency, while the Reserve Bank of India has regained its credibility under the stewardship of the now-departed Raghuram Rajan.
While an independent monetary policy committee and benign inflation outlook has restored international investors’ faith in India, the RBI’s revamp of the corporate bond market will transform domestic financing.
The scale of the bond reforms has been breathtaking. Indian companies now have access to longer-term, fixed-rate funding, banks can better match their assets and liabilities, and rupee debt can be raised overseas. Onshore bond auctions are also moving online, dragging India’s arcane debt markets into the 21st century, REITs and infrastructure trusts are on the way, and a proper bankruptcy law is in place.
This is deep surgery, indeed, but no more than was required. As India’s banks struggle to adapt to global capital standards, the capital markets are taking on ever greater significance. They need to be up to the task.
Rajan has prescribed even deeper surgery for the banks, which still need to raise capital and address bad debts to right the wrongs of the past, but the measures taken so far at least make that a viable course of action by allowing the capital markets to share some of the burden.
The reforms now in place raise the question why the investment cycle has not yet restarted. Investors can certainly be forgiven for hesitating to repeat past mistakes, but the old excuses of restrictive regulations and excessive red tape are wearing thin. Issuers, too, are at fault for allowing unrealistic price expectations to delay their expansion plans. Sooner or later, a stronger policy environment has to pay off.
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