IFR’s latest India seminar took place in Mumbai during a timely break in the summer monsoon rains. Over two sessions, delegates debated the outlook for Indian fixed income and the potential for Green finance, tapping into two of the hottest topics in the country’s capital markets.
The stormy season proved to be an appropriate backdrop for a discussion on Indian bonds. Rising yields have given investors pause for thought, and recent regulatory reforms have forced some arrangers to rethink their business models.
As well as a near-150bp jump in the 10-year rupee benchmark yield over the past 12 months, Indian issuers are also facing a tougher time in the global markets, where volatile US Treasuries and a pullback from emerging markets have added to the challenges this year. And closer to home, an effort to improve transparency and pricing discipline through electronic bidding platforms is disrupting the arranger/investor dynamic.
But it’s also clear that the outlook for Indian fixed income has never been brighter. As the country’s overstretched banks struggle to keep pace with credit growth, the bond market is taking on a more important role in financing the economy.
Regulatory changes are providing both the ‘push’ and ‘pull’ factors. The central bank now requires the country’s biggest borrowers to obtain a portion of any additional funding from the capital markets, in a bid to limit systemic risks to the banking sector. And the inflow of money following the demonetisation of late 2016 has opened up the mutual fund industry as an attractive source of alternative finance.
Green finance is heading towards a similar inflection point. Since Prime Minister Narendra Modi pledged to increase renewable energy capacity to 175 gigawatts by 2022, international contractors have piled in and equity investments have raced up. Local investors are now catching on, with more mutual funds and asset managers signing up to the UN’s Principles of Responsible Investment in recent months.
As more green projects come online, bond issuance will surely follow. To speed things along, however, some market participants believe a regulatory push is needed – perhaps through designating Green finance as a priority sector for Indian banks.
Cost issues remain a challenge for Indian issuers, who see little advantage in obtaining a third-party green certification without a direct link to lower interest margins. Frequent issuers, such as Export-Import Bank of India, however, appreciate the longer-term benefit from accessing a more diverse investor base – especially if green funds hold to maturity.
India’s long-term forecast is undeniably positive – both for Green finance and debt capital markets more broadly. As with the monsoon rains, some short-term disruption may be necessary for India’s bond markets to grow to their full potential.