India's remarkable economic growth story is setting a new narrative for global investments. With a young and dynamic workforce, a growing middle class and its ongoing economic reforms, India is emerging as a top destination for international investors. “Broadly speaking, India is among the best-placed emerging markets and there's a huge opportunity ahead in terms of scaling up,” says Shriram Ramanathan, CIO of Fixed Income at HSBC Asset Management India.
“India's standout performance in crucial aspects like political stability, macroeconomic policy stability and currency stability sets it apart from many other Asian and emerging economies. It is one of the largest bond markets in the emerging market space, coming in behind China and Brazil. Despite its potential, it remains remarkably under-owned, presenting a substantial opportunity for growth and scalability.”
India's allure in the capital markets results from groundbreaking reforms. “The adoption of a flexible inflation-targeting regime and the establishment of the Monetary Policy Committee in 2016 has been fundamental in improving the transparency and accountability of India’s monetary policy,” says Shriram. This, together with the robust regulatory oversight by the Reserve Bank of India and the Securities and Exchange Board of India, has instilled confidence in the market. “Comparatively, the regulatory environment in India is strong, reducing the likelihood of credit events that could disrupt bond markets,” adds Shriram.
In the last five years, the government has been focusing on supply-side initiatives, such as the Production-Linked Incentive programme, which aims to strengthen domestic manufacturing and provides incentives for companies to perform and grow over time, explains Venugopal Manghat, CIO of Equity, HSBC Asset Management India. “This focus on improving the supply side carries dual benefits: gradual job creation and a structural reduction in inflation. New economic and export-driven sectors are included in the schemes and are areas that would also directly benefit India from a global supply chain perspective.”
Reforms such as the Goods and Services Tax and real estate regulations have streamlined logistics, reduced costs and increased transparency, creating a favourable environment for investors. Bank balance sheets have been effectively cleaned up as a result of the bankruptcy law's implementation, paving the way for the next phase of credit growth, particularly in the corporate sector.
JP Morgan's recent decision to include Indian government bonds in the Government Bond Index-Emerging Markets index has underscored the country's economic significance on the world stage. This landmark move, announced in September, marked a pivotal moment for India's economy, prompting Finance Minister Nirmala Sitharaman to call it a “$23bn event” with far-reaching implications.
With India's local currency bonds finally acquiring global index representation in June 2024, Shriram says this is a critical period for the fixed-income market, which provides investors with the opportunity to “tap into the country's robust economic growth and potentially higher yields when compared to other comparative markets”.
India bonds that can be added to JP Morgan's indices are government bonds that follow the Fully Accessible Route, as long as they meet certain criteria for residual maturity. According to Shriram, while investors would gain exposure to India bonds as part of this index inclusion, given its relatively narrow focus they may also want to consider a separate India-only fixed income strategy for fuller access to this large, liquid and attractive market.
Indian rupee corporate bonds do not currently factor into index inclusion considerations. This opens the door to constructing a diversified investment portfolio using a strategy that includes government, quasi-government, and corporate bonds. Despite India's undeniable economic significance, its expected index weighting remains relatively modest. A dedicated India bond strategy can provide investors with more balanced exposure, ensuring a well-rounded representation within their portfolios.
“One of the huge positives in the overall global portfolio context is that Indian bond markets have very low correlations with the rest of the global bond market – as low as 10 to 15 per cent,” says Shriram. “Right now, what's driving the majority of the world is waves of similar movements across developed markets. To that extent, India offers an excellent diversifier.”
With a market capitalisation of $3.84tn, India boasts a significant equity market. However, it is noticeably underrepresented in global indices, despite contributing 7.5 per cent to the world's gross domestic productNew Delhi Investment. The Spring 2023 India Development Update by the World Bank notes that despite significant global challenges, India stood out as one of the fastest-growing major economies. It achieved the second-highest growth rate among G20 countries, nearly double the average for emerging market economies.
In the first three quarters of FY22/23, India's real GDP expanded by 7.7 per cent year-on-year. According to the report, India's rapidly expanding middle class and robust domestic consumption fuelled this growth. This presents distinctive investment opportunities that may not be fully realised within a broader emerging market index.
“India's equity market has consistently demonstrated strength and resilience, even in the face of global market volatility,” says Manghat. At the same time, India's FDI equity inflows reached $46.03bn in FY22/23, and the country now ranks third globally in producing unicorns. “The adaptability of India's private sector, along with the active participation of large domestic investors, make a compelling case for considering India as a standalone market,” Manghat adds.Jaipur Stock
As global investors increasingly turn their attention to India, the country's comparative competitive edge is poised to reshape the narrative surrounding emerging market investments, whether through bonds or equities.
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