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Robust economic growth and increased cross-border investment have led to a surge in trading activity in the subcontinent.
India’s capital markets are thriving, offering a wealth of financing options to businesses and traders.
India is projected to be the fastest growing economy in the G20. According to rating agency Moody’s, India’s GDP growth rate is expected to rise to 8% year-on-year in the fiscal year ending March 2024, supported by high levels of capital investment and domestic consumption.
The strong domestic economy is driving high levels of foreign direct investment (FDI), with the Indian government expecting annual FDI inflows to exceed USD 100 billion in the coming years.
In addition to its strong economic performance, India is also attracting attention from international investors looking to diversify their investment portfolios in the Asia-Pacific region. Much of this activity is being driven by global companies’ desire to adjust their risk exposure to China, which can be achieved by increasing allocations to other parts of the region such as India.
The increase in inbound investment is complemented by a booming domestic investment market. For example, driven by the rapid growth of India’s middle class, the country’s mutual fund industry doubled in assets under management (AUM) in just four years from 2020 to 2023.
Local capital market shines
India’s capital market is surging on the back of this increased flow of domestic and foreign investment.
On the equity front, India ranks as the world’s most active initial public offering (IPO) market in 2023, recording more IPOs than any other region. A total of 57 Indian companies launched mainboard IPOs last year, up from 40 in 2022, according to capital markets data provider Prime Database. As a result, the market capitalization of the Indian stock market reached approximately $4 trillion for the first time, surpassing Hong Kong to become the seventh largest market in the world.
Debt capital markets have also shown impressive performance, with global investors showing appetite for opportunities to increase their exposure to Indian government bonds. India is scheduled to join JPMorgan’s Emerging Markets Bond Index for the first time in June 2024, and demand is expected to remain strong. This is expected to result in additional inflows to the Indian bond market of $25 billion to $26 billion.
India’s banking sector is also strong. Moody’s notes that the country’s banks are well-capitalized and have the option of raising additional capital on the stock market if needed. Banks’ profitability improved as loan loss rates declined.
Stability in the banking sector is supporting strong growth in lending activity, with Indian banks reporting 23% credit growth in 2023, according to EY.
Borrower’s options
For companies seeking financing, stable capital markets and a healthy banking sector have provided borrowers with abundant liquidity and ample opportunities to structure financing packages that meet their requirements.
Both the offshore dollar-denominated bond market and the domestic rupee-denominated bond market are open for business. The domestic currency bond market has been particularly active given the large inflows from domestic and foreign investors into rupee-denominated funds and assets. Additionally, offshore dollar-denominated debt activity is also expected to increase as interest rates stabilize across the global economy.
Borrowers are also benefiting from the growth of the private credit market. Several international private market managers have opened offices in India to facilitate rupee financing for M&A transactions.
According to EY, private credit flow in India reached 108 deals worth $7.8 billion in 2023, up from 77 deals worth $5.3 billion a year ago. Additionally, an increase in activity levels is on the horizon.according to bloombergmarket players believe that India’s private credit under management (approximately USD 15 billion as of December 2022, according to Preqin) could double within the next two years.
having one’s feet on the ground
Despite the strong momentum driving India’s bond market, the country’s credit fundamentals pose some risks. Therefore, dealmakers must always be aware.
India heads to the polls this year, with general elections scheduled for the second quarter of 2024. Investors are closely watching the results, and trading volume could cool before the vote as market participants await the results.
Moreover, in certain situations, domestic and foreign investors also find it difficult to assess the risks of this market due to its rapid development. For example, a series of bankruptcies involving non-banking financial companies (Indian entities that make loans but do not take deposits or fund loans from the wholesale bond market) before the pandemic-induced lockdowns have led to a series of failures involving Fresh in my memory of home. Recently, high-profile Term Loan B (TLB) loans raised by Indian borrowers have defaulted or been trading at deep discounts.
The challenges faced by non-banking financial companies and TLBs show that while India’s debt market is rapidly evolving, lenders and borrowers are still grappling with new financial products. For example, his complex TLB is issued offshore, with assets located onshore in India, but the issuing entity is based overseas.
The Indian bond market is still at a mature stage. New financing tools should be approached with caution and should only be considered by issuers with strong track records and risk management capabilities.
bright outlook
Despite the challenges mentioned above, the outlook for the Indian bond market is bright, with upside opportunities outweighing the risks.
Bond market participants, bank lenders and private credit providers are thriving in India, eager to lend to companies operating in one of the world’s fastest growing economies.
In addition to rapid growth, supportive regulations are also encouraging further investment in the country. India’s reforms to its insolvency and insolvency laws are an example of how these frameworks are maturing and providing international investors with the protection and oversight they need to mitigate downside risks.
India is not only a high-demand emerging market, but also an increasingly sophisticated jurisdiction, capitalizing on current tailwinds to build a strong regulatory and commercial foundation to support long-term sustainable growth.
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