Lenders at the gates

India remains reluctant to lift caps on foreign investment in corporate bonds. Critics say the country should change its stance now.

India's regulators eye the inflow of foreign capital into their country warily, not least because today's runaway economic growth may easily evolve into tomorrow's inflation. The wariness has consequences: the corporate bond market for example, capitalised at $36 billion as of March 2007 according to National Stock Exchange data, has a cap of only $1.5 billion on foreign investment, and regulators are tightening restrictions on external borrowing as well.

However, delegates at a recent credit conference in Mumbai cited the country's aim to raise billions for infrastructure upgrades as reason enough to lift the lending caps. Such a reform could provide opportunities for foreign investors to tap the country's surging growth with ever more sophisticated financial instruments.

“The need for developing and opening our credit markets to overseas investors is the need of the hour,” Naina Lal Kidwai, the country head of HSBC, told the conference.

Other speakers noted that the local market remains too shallow to meet the country's financing needs on its own, as Indian banks and pension funds are severely restricted from owning even the highest-rated credits. As a result, the country's second tier credits borrow from the banks directly.

Maneesh Malhorta, the head of debt finance for HSBC, explained that foreign investors would bring the expertise and capacity to invest in riskier bonds.

There is some optimism that change may be on the way. Indian Prime Minister Manmohan Singh has announced that the country must develop its credit markets to fund growth, and a panel appointed by the central bank has opined that foreign investment limits in corporate debt should be increased. Despite these declarations, no formal process to lift the caps is yet underway.

However, even among those arguing for credit market liberalisation, some propose a conservative approach in order to open up opportunities in specific sectors. “They could allow sectoral caps, allow more money to come into infrastructure, allow more money to come into five-year tenures and above,” said Shobhit Mehrota of HDFC Asset Management. No doubt foreigners looking to provide Indian clients with debt, bonds and other credit instruments eagerly await the next sign that some reform, no matter how measured, will be instigated soon.