India’s debt markets have weathered their fair share of challenges over the past few years. Long before the Coronavirus pandemic began to make its presence felt around the world, India had suffered from a string of defaults in non-banking financial companies, sapping the confidence of the financial sector. The onset of the Covid-19 crisis shattered the already fragile sentiment in the market and wiped out years of India’s hard-won economic expansion.
Alongside the action taken by its international peers, the Reserve Bank of India announced unprecedented measures to ensure the smooth flow of capital to corporates – adding liquidity to markets and slashing interest rates.
While a strong policy response to the pandemic protected India from a full-blown financial crisis, it also delayed the implementation of reforms designed to reduce the economy’s dependence on its creaking state banks. But, if there is to be less reliance on the state banks for credit, there needs to be a conduit by which a new breed of investors can satisfy the needs of corporate India to rebuild and expand, and for the country to leverage the private sector to reach its infrastructure and climate-related aspirations. That conduit is an efficient, reliable and functioning debt capital market. India’s bond markets are not there yet.
Indian companies raised a total of Rs3.1trn (US$41bn) from the domestic bond market in 2021, according to Refinitiv, down from the Rs4.5trn borrowed in 2020. Corporate India was also able to tap the offshore bond market for US$20bn, with a third of the issuance having an environmental and social governance theme. But it is not enough.
India’s domestic bond market is comprised of a narrow group of issuers – it is full of Double A and Triple A borrowers with lower-rated corporates still unable to access the debt markets to raise funds. Even if they could, there is a lack of suitable, liquid hedging instruments. And, although there is a national push towards green projects and renewable energy, there has hardly been any sign of appetite from domestic investors for ESG issuance.
Likewise, access to offshore bonds is only feasible for the best corporates and, even then, the process for tapping the dollar markets is beset with restrictions and red tape. Foreign investment into India is also treated with a fair degree of suspicion.
Yet there are signs of change. New structures are appearing in the infrastructure space, while regulatory, structural and technological developments hold the promise of increasing liquidity, opening the market to a new breed of investor.
And then there’s the prospect of India’s government bonds joining the global bond indices, attracting billions of dollars into Indian debt markets as a result. It could – and should – be a game changer.
In November, IFR Asia held its India DCM Roundtable, hosted by Asia Credit Correspondent, Krishna Merchant, to discuss the development of the Indian debt market, its challenges and opportunities.
To see the digital version of this roundtable, please click here
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