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Tuesday, 25 June 2019

India: Sowing the seeds of recovery

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Indian women plant rice plants in their field in Malaka, in the northern Indian city of Allahabad.

Source: Reuters/Jitendra Prakash

Indian women plant rice plants in their field in Malaka, in the northern Indian city of Allahabad.

This year’s India report comes at an especially challenging time for the world’s second most populous nation.

The near-20% slump in the rupee is the most obvious symptom of the crisis of confidence buffeting the country, and also one that risks making things worse by eroding unhedged balance sheets and importing inflation.

Comparisons with India’s balance-of-payments crisis in the early 1990s are becoming more commonplace. The situation today is not yet as serious, but India risks falling into a full-blown fiscal crisis if it cannot reverse the outflow of investment.

From a capital-markets perspective, it’s not hard to see how India has ended up in such a precarious position.

In many respects, India is its own worst enemy, with a long-standing habit for self-defeating policies and contradictory regulations. The confusion that followed last year’s withholding tax cut on overseas bonds and the rupee’s reaction to tightening measures from a panicking central bank are just two of many such examples.

Similarly, pushing borrowers overseas to relieve pressure on the currency means little without a meaningful review of cost, size and tenor restrictions under the external commercial borrowing regime.

India’s problems are well documented. While this report cannot ignore the reality, it also aims to analyse potential solutions that can help lift India out of its present predicament.

The financial markets certainly need to develop further, and recent measures show some welcome recognition that the lack of depth in the domestic bond market is a serious shortcoming.

However, a straw poll of market participants confirms that funding is far from the country’s biggest hurdle. Debt finance remains available for capital expenditure, and even the biggest projects have successfully secured funding in recent months.

Overseas bond markets remain open – albeit at a price – and local equity markets have begun to respond to the government’s efforts to restore confidence. The rupee, too, has recovered some ground after plunging to a record low against the US dollar.

Many of India’s biggest challenges are self inflicted, the result of cumbersome regulations and a bloated bureaucracy. Implementing structural changes will not be easy, but the latest market rout may prove the ideal backdrop for the government to push through long-overdue reforms.

If India can address policy and structural issues, this challenging period could prove to be one of the best times to invest.

To see the digital version of this report, please click here.

Contents:

Overview: Light in the gloom

India’s growth is stalling, the rupee is sliding and elections are looming, but there is still room for optimism.

Banking: Branching out

India’s business leaders are fighting for new banking licences even as more foreign institutions are withdrawing. Does the country’s banking sector have any real appeal?

Crisis management: Steps to salvation

IFR presents 10 recommendations to help India put its economy and its investment appeal back on track.

Domestic bonds: Innovations of necessity

Growing volumes and boundless innovation promise a bright future for the rupee bond market, but convincing institutional investors to take on credit risk will be crucial if it is to reach its full potential.

Infrastructure finance: Resetting the cycle

After the boom times that catapulted Indian banks to the top of the global project-finance table, a series of bust concessions has rocked the country’s related market. Restoring confidence among infrastructure financiers has never been more important.

International bonds: Pause for thought

Tax changes and low rates lured more Indian issuers to the offshore bond markets earlier this year, before a global risk reversal put a stop to it. Investors are now waiting for stability before markets reopen fully.

Equity capital markets: Safety first

The safety net provision in recent Indian IPOs points to a determined bid to draw retail investors back to the market. However, even the controversial buyback scheme has failed to prevent a slowdown in new listings.

Offshore loans: On standby for more

Amid declining overseas loan volumes, standby letters of credit have provided some welcome relief for Indian bankers in the past 12 months.

Case study: Tata Steel

After its ambitious acquisition of European rival Corus more than five years ago, Tata Steel’s latest debt market outing has underlined the availability of local financing for even the biggest Indian projects.

Interview: Ravi Mathur

The head of India’s Department of Disinvestment has balanced the needs of both the capital markets and public sector unions in his quest to increase the proceeds from share sales.

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