Offshore or onshore, access to Rupee financing is the key
India is well on its way towards achieving meaningful financial sector reform and development, and time is of essence. Last month, the International Monetary Fund (IMF) stated that India will overtake China as the world’s fastest growing economy in 2015, buoyed by a rising middle-class, a young population, and competitive labour costs.
The Challenge
Ensuring India’s capital markets keep pace and meet the financing needs of the private sector, the key driver of growth, jobs and innovation. Deep and liquid capital markets are the most efficient way to allocate resources in an economy. They channel funds to infrastructure, housing, small and medium enterprises, and other vital sectors: consider that growth in OECD countries has largely been fuelled by domestic investment. Developing countries need to mobilise domestic resources and international savings for investment in their growth. Vibrant local capital markets also provide resilience against capital flow shocks, a key lesson we learned from the Asian financial crisis in the 1990s.
Providing a broader range of investment opportunities for money managers and more diverse financing alternatives for the private sector is critical for India. And the government is taking steps in the right direction. This includes innovative measures allowing Indian companies to issue offshore rupee bonds, promoting private investment in infrastructure, and enabling clearing and settlement of foreign currency transactions in the new international finance city in Gujarat.
There is still a long way to go. India’s corporate bond market is around 10% of it’s GDP. That forces Indian companies to rely largely on bank finance and equity markets for funding. In China, corporate debt amounts to 18% of GDP; in the US, the figure is over 90%. Following the Reserve Bank of India’s recent credit policy statement, Indian companies can now seek funding in the offshore rupee markets. This creates an important new source of financing for India’s private sector. At the same time there are challenges for companies that are first-time issuers in the international capital markets. Investors may not be familiar with companies, or they may not be comfortable with their credit rating. Recently, the International Financial Corporation (IFC), part of the World Bank Group, supported the first domestic issuance by a large Indonesian residential property provider through a 20% guarantee for the company’s bond. The IFC also helped a Nigerian oil and gas company issue its first bond in the international capital markets. To encourage other investors, IFC committed to purchasing 10% of the bonds before they were offered to the market. Both issuances were highly successful.
The IFC has worked in partnership with India for many years. Both share a commitment to support and develop capital markets so they can meet the private sector’s financing needs and help the country realise its full economic potential. Following approval by the government, the IFC launched a Rs 184 billion ‘Masala’ offshore bond program, and in less than two years has already sold bonds worth Rs 83 billion to investors globally. The bonds range in tenor from three to ten years. The program successfully created an international triple-A yield curve for the offshore rupee markets. In the onshore markets, the IFC has issued ‘Maharaja’ bonds of Rs 6 billion. The success of the Masala and Maharaja bonds proves that India’s capital markets are ready for business.
India continues on its ambitious reform path. The government is determined to deepen the country’s capital markets and provide Indian corporates access to onshore and offshore rupee financing. The IFC is a strong partner in this effort. The timing for achieving our goals has never been more auspicious.
