India can be second G3 denominated bond user

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Economic growth and increase in dependence of debt capital are drivers

India could become the second-largest G3 (US dollars, yen and euros) denominated bond issuer in Asia, reaching the $ 160 billion mark by 2018. This will be driven by the economic growth and capital needs as well as gradual increase in dependence of debt capital, according to Morgan Stanley.

“A pick-up in economic growth and rising private capital needs will be important drivers for Indian credit markets, along with an increased reliance on the debt capital markets in the future. The bulk of the marginal increase should come from non-financial corporations, as their reliance on capital markets grows from an extremely low base,” said Morgan Stanley report titled “The Next India-Fixed Income: From Volatility to Moderation.”

Viktor Hjort, head of Asia fixed income research, Morgan Stanley said “India’s credit markets will likely triple in size over the coming five years, partly reflecting growth and capital needs, but mostly increasing reliance on debt capital markets.”

In 2007, the Indian USD/G3-denominated bond market was small and illiquid, composed mostly of state-owned banks. We expect the size of the Indian USD/G3 bond market to reach US$160 billion by 2018, driven by non-financials.

On average, the Indian USD/G3 bond market should see annual gross issuance in excess of US$25 billion in the years to 2018, the report said.

India with 15 per cent of the USD/G3 bond market would be the second largest issuer behind China (44 per cent). China would dominate the USD/G3 bond market, due to the size of its economy, the capital requirements, and tighter on-shore lending conditions, the report said.

"We estimate that Indian corporations will need to raise an additional $ 700 billion of capital between now and 2018," Morgan Stanley said, based on the nominal GDP growth estimates and investments as a percentage of GDP.

India’s shrinking excess saving should continue to put downward pressure on bank loan growth, and this along with gradually greater access to capital markets, should make companies rely more on the bond markets,” Morgan Stanley said.

On average, the Indian USD/G3 bond market should see annual gross issuance in excess of $ 30 billion by 2018. Again, non-financial corporations should dominate the issuance, accounting for more than 50 per cent of the overall annual issuance by 2018.

Existing investors would be an answer, but we also expect global credit investors, Asian life insurers and Asian mutual funds to play a big role in future demand, for Indian credit.

raviranjan

@mydigitalfc.com

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