In a Bloomberg survey, exclusive to Mint, 58% of respondents find it ‘much more difficult’ to access India’s markets than the others they participate in
Top global asset and fund managers said they find accessing India’s financial markets more difficult than other key markets
Mumbai: Investors see opportunities in India’s bond market but cite capital controls, low market liquidity and lack of electronic access as key barriers. There is considerable optimism that improving ease of access to India’s financial markets will generate new investment, but there are significant barriers to India achieving its ambitions, according to a Bloomberg survey shared exclusively with Mint.
International investors also highlight a pressing need to remove barriers to foreign participation in the debt capital market, reform the taxation system, overhaul regulations, and encourage foreign investors to play a bigger role in the economy. Many of these steps are also prerequisites for India’s eventual inclusion in global indices that could channel its share of trillions of dollars of passive global investment into the economy, they said.
Top global asset and fund managers said they find accessing India’s financial markets more difficult than other key markets. An overwhelming 76% of respondents found it either “much more difficult" and “more difficult" to access India’s financial markets than the other markets they participate in, the survey revealed. The stark figures underscore the potential that India could unlock if it increases its ease of access, it revealed.
“There needs to be a steady flow of foreign capital every year as it is not sustainable for the Reserve Bank to provide liquidity through their open market operations every year," said the report.
Increasing ease of access
However, despite the roadblocks, the Indian bond and equity markets still remain attractive, with pent-up demand among investors. There is a lot of opportunity for India to increase foreign participation in its financial markets, with 92% of respondents saying that they would increase participation if access were easier.
“India is the only large, investment-grade relevant economy I can think of that is not in the indices," said a respondent.
“The implication is that if we take a five-year view, the inclusion of China in the global indices is the biggest market structure shift we are living through and will take away a lot of global liquidity at the expense of developed and emerging markets. So it will come at the expense of the US, Japan, Europe, India, Indonesia and Brazil."
Capital controls are seen as the greatest barrier to accessing India’s financial markets, according to the survey, with 37% citing it as their main concern. Market liquidity (22%) and lack of electronic access (14%) were the other significant roadblocks. Respondents noted the need for licences to start bond investment, limitations on foreign ownership, lengthy account opening processes, and the need to manage frequently changing regulatory guidelines as frustrating aspects of requirements to participate in India’s markets.
A large section of the respondents (43%) said clearer regulatory guidelines would increase ease of access and lead to greater foreign investor participation. A tax structure more attractive to foreign investors, abolishing capital gains tax, lifting all caps on foreign investor ownership, easier processes to set up new accounts, liberalization of the Reserve Bank of India’s regulations and stopping frequent changes to regulations are some measures they said that could increase access to the country’s financial markets.
Better research and clearer corporate governance were other measures that respondents said could help increase access. A few respondents also pointed out that India needs a dollar-denominated market.
Deepening bond markets
Respondents indicated that more depth in corporate markets and a more active yield curve is required in India. The country has an active bond trading market, but most of the trading is concentrated on just two or three bonds, respondents noted.
There is also a need for the inclusion of foreign bond issuances so that India has a steady flow of money from passive investors. For example, India is not a member of the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) Global Index, but would be included if access were easier.
Banks in India at present run the risk of not having guaranteed settlement for corporate bonds, especially those that are illiquid.
Respondent have thus called for an easier and clearer settlement process. Red tape, such as the requiring foreign portfolio investor (FPI) licences to start bond investments is restricting bond trades and investors are calling for regulations to be eased to increase participation significantly.
“Based on Bloomberg’s experience in global fixed income markets, there are four key criteria in creating an investible bond market—regulatory guidelines, market access, investor demand, and improved benchmarks. Having these factors in place will enable India to capitalize on a robust bond market that will ultimately unlock new financing opportunities, enhance capital allocation, and drive economic growth," said Nitin Jaiswal, head of government affairs for Bloomberg, Asia Pacific.
The current low-to-negative interest rate environment around the world is making Indian bonds an even more attractive option for some investors, according to Steve Berkley, global head of Bloomberg Indices.
“Cultivating a stronger bond market to help underwrite the burgeoning economy is necessary if India is to reach its bold ambitions of becoming a $5 trillion economy by 2024 and, according to Bloomberg base-case estimates, $8.4 trillion by 2030. If it can do so, India’s economy could be the third-largest by 2026, behind China and the US," said Berkley.
For Indian bonds to be included in some of the most important global indices, many of which are tracked by trillions of dollars of benchmark-driven assets under management, the country’s local currency debt market must be classified as investment grade, said Berkley.
“The currency must be freely tradable, convertible, hedgeable, and free of capital controls. China’s recent inclusion in the Bloomberg Barclays Global Aggregate Index could hold guide points for India in achieving similar index inclusion," he said.
The Bloomberg survey was conducted over four months in 2019 where a total of 65 buy-side and sell-side investors across Asia Pacific, the US, the UK, and West Asia provided responses on their views on ease of access to financial markets in India.
Of these participants, 19% participated in India’s bond market, while 52% participated in India’s equity market.