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UTI sees strong growth for India's fixed income market [Gulf News (United Arab Emirates)](Gulf News (United Arab Emirates) Via Acquire Media NewsEdge) Dubai: India's bond market is set for strong growth both in terms of supply and demand as the central government is pushing ahead with its growth ambition and opening up the domestic market for foreign investments, said Amandeep Chopra, Head-Fixed Income, UTI AMC. While the equity market has attracted close to $12 billion (Dh44 billion) in foreign investments in the first 8 months of this year, foreign investors pumped more than 14 billion. "Investors are attracted to the relatively high yield of 8.5 per cent. Recent fiscal and monetary policy measures are yielding results in terms of reduced inflationary pressures and decline in current account deficit which is reflected in growing demand for Indian debt," said Chopra. The Indian economy is expected to make a crucial recovery from 4.7 per cent GDP growth in 2014 to 5.4 per cent in 2015. Inflation is seen moderating as the Reserve Bank of India (RBI) seems committed to achieve its disinflation glide path with 8 per cent consumer price inflation (CPI) by January 2015 and 6 per cent by January 2016. Fiscal consolidation measures signal a drop in fiscal deficit to a projected deficit of 4.6 per cent in 2014 and 4.1 per cent in 2015. Standard and Poor's raised the outlook for India's "BBB-minus" rating to "stable" from "negative," saying the country's government mandate and improved political setting offered a conducive environment for reforms. In the fixed income space, all the funds in debt funds advanced with no decline as the bonds rallied on Friday, posting their fourth consecutive week of gains, after Standard & Poor's upgraded India's sovereign credit outlook, raising the prospects of greater foreign portfolio investors in bond markets. At a time when the US and a number of developed economies are poised for rate hikes next year, India, on the other hand is at the peak of its interest rate cycle and preparing for rate cuts. This counter-cyclicality, according to Chopra, makes India very attractive to investors. Additionally, the negative correlation Indian rupee bond yields have with 10-year US treasuries makes it attractive to foreign investors compared to other emerging market bonds. As global growth picks up pace, risk appetite is bound to increase and demand for emerging markets' assets are likely to increase. Among the emerging markets debt, according to Chopra, Indian fixed income stands out in terms of yield and the macro fundamentals support the investment outlook. Foreign investment On the supply side of the Indian fixed income market, the Indian Government is the biggest issuer. The current total issuance outstanding is approximately $800 billion, of which sovereign paper is $500 billion. State Owned Enterprises contribute another $200 billion and the rest is corporate issuance. The huge funding requirement of the Indian private sector is expected to boost the supply side of debt instruments. In the next three to five years, private sector investments may represent half of the $1 trillion needed for infrastructure projects in the India. Many leading corporates are part of the infrastructure development in the country and thus, corporate debt issuance is expected to pick up pace from this year. Faced by the enormous demand for Indian fixed income, the Indian government recently increased the quantum of government bonds permissible for purchase by foreign investors by $5 billion to $25 billion. Thus, as India grows, the debt markets will steadily open up to foreign investment. In most developed countries, the bond market's market is bigger than the market capitalisation of domestic equity markets but it's the reverse in India; India's equity market is around $1.4 trillion in capitalisation and the debt market is roughly 60 per cent of that. Thus, debt markets will have to play some serious catch-up, not just in terms of volume but also in terms of product sophistication. As regulations change, the investment banks in India are waiting in the wings with progressive new products and ways of structuring and parcelling risk. Corporates have traditionally relied on loans from Indian banks to raise resources and that has led to banks with extended balance sheets in capital intensive projects with long payback periods. We expect that at some stage, with the advent of securitisation, a greater number of domestic and foreign investors will be able to find investment opportunities that match their risk profile. The 2014 budget has already proposed the clearing of local currency debt securities through Euroclear, for example, and we anticipate two options. (c) 2014 Al Nisr Publishing LLC . All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info). |