The benefits of attracting foreign capital to local bond markets has long been a mantra in Asia, and has been enshrined in the most developed economies of the region as an explicit policy goal, although there has been patchy success in terms of meeting this goal.
There are numerous idiosyncratic reasons to explain this, not least shaky public finances and the consequent risk of currency depreciation, political instability and high delinquency rates in the banking system.
India is a notable example when it comes to ticking those boxes, and nowhere is this fact more evident than in the secondary debt markets. To be specific, here I’m referring to the market for secondary Indian debt denominated in offshore currency, principally US dollars.
There is something of an avalanche of selling currently manifested in the market for Indian loans and bonds, and the drivers of the selling are offshore portfolio investors.
Numerous names are on the block from industrial sectors at which Indian banks - principally in the state-owned segment - threw money with seemingly reckless abandon. Someone needed to tell the bankers who signed off on the relevant debt about the dangers of concentration risk.
Paper from stressed Indian industrial sectors such as textiles, steel, petrochemicals and energy, largely denominated in US dollars, is circulating around the secondary market, some of it offered at deeply distressed prices, some at a range between 60-90 cents on the dollar.
At the same time, the primary syndicated offshore loan market for Indian names is experiencing expanded timelines thanks to a mindset leery of Indian credit. Unsurprisingly, primary market loan margins against Libor are also rising in a bid to attract lenders into bank syndicates.
So, the question one is compelled to ask is: how can the Indian domestic debt market present an attractive proposition to foreign investors, when the very same group of individuals is engaged in the energetic selling of the country’s offshore debt?
That’s a tough question to answer in a country which has a relatively recent record of sharp currency depreciation, a US$12.6-billion-equivalent bolstering of bank balance sheets from government coffers - enacted last year, principally in the state-owned sector, and necessitated by imprudent lending - and sclerotic market regulation.
Meanwhile, a looming general election, likely to be held in May, hardly places India’s domestic bond market at the top of the wish list for international portfolio capital, at least as far as the short term is concerned.
Still, India’s financial authorities are doing their best to render the market sexy, with regulatory tweaks - which some market watchers regard as the epitome of desperation - announced earlier this month.
The hope is that the somewhat inelegantly named “voluntary retention route”, which will lift restrictions on tenor previously imposed on foreign portfolio investors in the domestic Indian bond market - subject to three-quarters of the investment remaining onshore in India - will ignite interest among offshore portfolio managers.
You never know, this policy may just work. It’s about time India’s regulators woke up and smelt the coffee and it seems to me they may just be doing that.
The relaxation of external commercial borrowing guidelines, also enacted earlier this month, together with a currency swap undertaken by the Reserve Bank of India with the aim of reducing hedging costs for onshore borrowers, suggests that the financial authorities are understanding the message being conveyed by the market.
A quiet revolution may be underway in the country’s capital markets, one which is long overdue.