How a trickle of foreign funds into India bonds can be turned into a flood

The trickle of foreign funds into India’s sovereign bonds can turn into a flood if Prime Minister Narendra Modi eases access to the nation’s debt that has made it the most restrictive among major Asian economies.

That’s the finding of a survey of asset managers -- in Singapore, Tokyo, London and New York -- conducted by Bloomberg. More than 90 per cent of the 65 investors said they would add to their holdings of rupee bonds if the curbs are eased, while 76 per cent said access to the nation’s market is harder compared with Asian peers.

Overseas funds have long sought greater access to Indian bonds, drawn to an economy where the yields are among Asia’s highest. Foreigners hold just 3.7 per cent of the almost Rs 60 trillion ($835 billion) of sovereign bonds issued by India, and the government has set a 6 per cent limit on foreign ownership.

In comparison, Indonesia has no restrictions and global funds own about 40 per cent of local currency government debt. Foreigners bought $245 million of rupee bonds this quarter, which pales in comparison to the $2.8 billion they pumped into Indonesia, data compiled by Bloomberg show.

The survey comes after Bloomberg LP, the parent company of Bloomberg News and Bloomberg Barclays Indices, in September announced that it would help Indian authorities navigate a course to inclusion in international bond benchmarks.

Getting added into global indexes could attract billions of dollars, which would supplement India’s waning domestic savings as Modi sets his sights on doubling the size of the economy over the next five years.

Here are other highlights of the report:

• 37 per cent of the respondents cited capital controls as the “greatest barrier” to accessing India’s financial markets

• Need for licenses to start bond investment, lengthy account-opening process and frequently changing rules are some of the frustrating aspects of investing in India

• Majority of respondents said clearer regulatory guidelines would increase ease of access and lead to deeper foreign investor participation with the following measures

• An attractive tax structure, the abolition of capital gains tax, liberalization of RBI norms

• Low market liquidity and lack of electronic access are among significant roadblocks

• Greater depth and a more active yield curve is needed in the corporate bond market