India's feeble coalition government is taking bold steps to reform its debt market. Just four months after opening up domestic corporate debt to foreign investors, it has let them into the government bond market.
The mood is upbeat among investment banks and fixed-income analysts looking to India as their next destination. "The first preference of any foreign investor is the local risk-free paper," says Stephen Van Wilberding, chief operating officer at investment bank DSP Merrill Lynch. "It's a simple calculation of weighing the rupee risk against the coupon."
With the Indian rupee expected to depreciate annually by between 5% and 7% (annual depreciation of the rupee averaged 4.4% in the last three years), he says, the current 13% coupon on two-year to three-year Indian gilts matches returns in the favourite emerging markets in the region: Indonesia, Thailand and South Korea.
Most foreign portfolio funds invested in the Indian bourses are in equity but analysts expect around $1.5 billion to flow into Indian debt this year. Three debt funds floated by Chescor International, Credit Suisse and Schroders have already been cleared to invest $203 million. Among those waiting in the wings are Peregrine, Templeton, Morgan Stanley and Barclays.