Expanding India’s Corporate Debt Markets

India'scorporate bond market is promising toforeign and small investors.

A deepening and widening of the nascent corporate bond market in India is on track, following the introduction of reforms by the Reserve Bank of India. The measures, which were unveiled in August, just days before Raghuram Rajan stood down as central bank governor, will allow foreign portfolio investors direct access to Indian corporate bonds and government securities (G-secs). Many restrictions on small investors’ participation were also lifted to help expand the corporate bond market.

Indian debt markets are dominated by government paper, which constitutes approximately 70% of the total market.

Thanks to Rajan’s reforms, foreign investors can now invest directly in corporate bonds, without having to go through Indian brokerage houses, saving time and money. The reforms will also give top-rated Indian corporates and G-secs a foothold in global capital markets.

All banks will be able to issue rupee-denominated “masala” bonds globally to shore up their capital base and fund infrastructure projects. Issuance of masala bonds was previously restricted to corporates, nonbanking finance companies and housing finance companies. “The [ability for] banks to raise masala bonds can develop the overseas market for rupee-denominated bonds, coupled with access to trade directly on G-secs and corporate bonds for foreign portfolio investors, which should improve liquidity in domestic markets,” says Karthik Srinivasan, senior vice president and co-head, financial sector ratings, at rating agency ICRA.

As part of the reforms, state-run, private and foreign banks can pledge corporate bonds as collateral to meet liquidity shortfalls. Previously, banks were only allowed to pledge G-secs as collateral.

The central bank has also given Indian companies permission to access the bond market beyond stipulated banks’ borrowing limits, allowing them to hedge options up to $30 million on their foreign currency exposure.