Players in Asia’s offshore sovereign debt have long lamented the absence of the Republic of India as a component to fill out the region’s secondary sovereign bond curve. Well, fairly soon they will be lamenting no longer, but will it be a case of “be careful what you wish for?”
To much fanfare, India’s newly-appointed finance minister Nirmala Sitharaman announced earlier this month that the country would be looking to fund a portion of its gross borrowing requirement via the offshore debt markets. The country’s finance officials have suggested that around 10%-15% of this year’s US$103 billion-equivalent borrowing requirement could be funded offshore.
Whilst the absence of India in Asia’s sovereign debt space implies a universe of natural buyers for any paper which emerges from the country, as well as the fact that the issuer ticks the investment-grade box and is included in the JPMorgan EM Bond Index, the implied US$10 billion or so, which that 10%-15% implies is something of an ask, if the funds are to be raised between now and April next year.
That would represent issuance at a bigger clip than any Asian sovereign has visited on the region’s G3 primary bond markets - even the Philippines during its early to mid-noughties offshore issuance binge didn’t print that amount in such a compressed period.
But leaving aside digestibility, India’s long-awaited offshore market foray comes at a time where its fortunes appear at their most vulnerable. GDP fell to a 20-quarter low of 5.8% in the January-March 2019 period.
That is some way short of the Modi government’s 8% target and underlines the country’s vulnerability across a range of measures, from the fiscal to the state of its troubled banking industry. The latter has just undergone another round of capital injection as banks struggle with non-performing loans and the execution of their basic mandate to lend money.
Meanwhile, the country’s crucial non-bank financial companies (NBFCs) are experiencing liquidity stress, partly as the result of the shock default late last year of Infrastructure Leasing & Financial Services. Consumer spending which is fed by NBFCs has sagged as a result.
In all this, it’s necessary to remember the horror story of the collapsing rupee around six years ago, which came at a time when the currencies of emerging market economies with steep budget deficits were being hammered. That basic vulnerability to the hidden hand of the market will only be worsened by having a large publicly traded benchmark bond out there as a visible barometer of any internal malaise.
So while the announcement of the offshore issuance plan took implied supply pressure off the domestic bond market, with rupee-denominated government bonds rallying sharply, that represents just the start of a new era which the government may yet come to regret.
The received wisdom which became something of a mantra after the Asian financial crisis of the dangers of borrowing in hard currency when your own is vulnerable to speculative attack appears to have been forgotten by India. Those who invest in its newly minted dollar paper may yet realize they should have been careful what they wished for as they put the perfect instrument for exposing national economic weakness on their books.