India Muni bonds fail to lure investors, global funds want more disclosure

India’s recent step to expand its tiny municipal bond market isn’t winning much enthusiasm from bankers, a bad sign for cities desperate for money to build new bridges, subways and sewers.

The central bank said last week that it would allow foreign portfolio investors to buy muni bonds. But municipalities need to improve their fiscal health and report financials in a more timely manner to attract foreign funds, which also want to see more local participation, according Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership Ltd.

Prime Minister Narendra Modi’s ruling Bharatiya Janata Party has pledged to spend $1.44 trillion on infrastructure as it seeks to retain power in elections that started this month. Those ambitions compare with a muni bond market with just Rs 13.9 billion ($199.8 million) of securities outstanding, with only about seven civic authorities having sold such debt since the capital markets regulator detailed rules in March 2015.

Lack of adequate disclosure among Indian municipalities has stymied demand for such securities even among local investors.

India is not alone in Asia in struggling to develop a healthier muni market. But the issue for China, which has greatly outpaced its neighbor in infrastructure development, is more one of huge supply with about $2.94 trillion worth of muni bonds outstanding.

In India, the dearth makes it an even harder sell for foreign investors, who can instead choose from a larger selection of government bonds.

“Foreign portfolio investors prefer to invest in markets that are deep and have good secondary market liquidity,” said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered Bank in Singapore.