Opening up the corporate bond market to widen and deepen the offering in Indian debt to both domestic and foreign players will be a significant reform and ensure larger integration with global peers. FPIs have been hungry for Indian debt and are waiting for the cap to be increased. Their net investment in Indian government and corporate paper has been gangbusters this calendar year.
For long, such reforms have eluded or moved at snail’s pace. The Reserve Bank of India (RBI) has been cautious while opening up corporate debt paper either through minor tinkering or readjustments. Given that foreign exposure in Indian corporate debt paper was hopelessly low at five per cent, it’s perhaps time for the RBI to consider opening the doors wider and exploit the opportunity.
Even in countries like Indonesia and Malaysia, foreign exposure in their respective debt markets was between 30 per cent and 35 per cent. In communist China also the global players have begun to pick up exposure in state-run companies debt paper. Though this is being done through Hong Kong, China has reportedly reconciled to the prospect of global players making their debut in the country’s debt market that’s virtually been non-existent in the past.
Cautious but consistent opening up of both corporate debt and government securities must happen in the next five years. While allowing private players in government securities happened in the last five years, similar strategy can be attempted for domestic corporate debt as well.
First step towards liberalising the corporate bond market could be to lift the Rs 244,323 crore limit set by the RBI for foreign portfolio investors (FPIs). Given that the RBI has shifted the rupee denominated masala bonds into external commercial borrowings (ECBs), already some space has been created for FPIs to invest up to Rs 40,000 crore in the next two quarters even within the existing cap. Otherwise, over 99 per cent of Indian paper has already been lapped up by FPIs.
Even if foreign fund outflows from Indian equities and strengthening of rupee prompted this move, there’s no reason why the RBI should not consider further space to FPIs given their limited exposure here. In fact, the RBI, Sebi and finance ministry will have to move in tandem to usher in debt market reforms for which the HR Khan committee laid down the roadmap several years ago. It is only in August 2016 that the RBI had moved to accept several of the recommendations, make investors life simple and enhance liquidity. For instance, corporate bonds were accepted as collateral under its liquidity adjustment facility to create a market for government securities. It had also removed the seven days restriction for listed companies lending in government securities repos.
The RBI had also facilitated corporate bond repos through a dedicated electronic platform. That was when the FPIs were given direct access to Indian corporate bond market without going through the domestic brokerages. This in fact encouraged FPIs to look at the Indian debt market more seriously. Simultaneously allowing banks and large blue chip state-owned enterprises to float masala bonds in London, Singapore, Hong Kong and elsewhere sent strong signals to global investors.
Though the Indian bond market was estimated to be over one trillion dollars, it’s dominated by government securities with limited opportunities to take exposure in corporate debt paper.
Listing of first Indian Bond Index on London Stock Exchange (LSE) was part of opening the country’s nascent bonds market to the global investors. While benchmarking Indian government paper was first of its kind, a similar attempt will have to be made with corporate bonds to lay the foundation for larger integration with global markets. Other US and European debt markets will have to be targeted in next two years to take Indian paper globally.
Concomitantly, the Indian growth story will have to remain intact, if domestic and foreign investors are to stay invested the markets. Refraining from a stimulus package will be the single biggest indicators for foreign investors to repose confidence in the Indian economy, its prospects and potential.