Deutsche Asset seeks more open Indian sovereign bond market

High transaction costs and operational hurdles make the Indian sovereign bond market less attractive to global investors, according to Deutsche Asset Management Investment. 

“India is not currently included in standard-used local market emerging bonds indices because of investment restrictions. For foreign investors, given the regulations, the process of investing in them is long lasting and may create additional transaction cost,” Nicolas Schlotthauer, head of emerging markets fixed income and portfolio manager at Deutsche Asset Management Investment, told Business Standard. 

“The most important restriction is the quota for foreign investors to invest in local bond market,” added Schlotthauer. 

Recently, the government raised the foreign portfolio investment (FPI) limit in government bonds to Rs 187,700 crore to boost inflow of foreign investments into Indian capital markets. Earlier, the limit was about Rs 185,000 crore.

However, according to Deutsche Asset Management Investment, dollar-denominated government bonds would be more attractive to foreign investors than rupee-denominated bonds. 

“The fact that India has not issued a dollar-denominated sovereign bond is a question that is striking us, as India has public debt in rupee. Many emerging market countries have dollar-denominated sovereign bonds, which then also serve as benchmark for the corporate bond market,” said Schlotthauer. 

India has so far refrained from issuing a dollar-denominated sovereign bond, except a few bonds issued by EXIM Bank. However, several public sector units have been issuing masala bonds to attract foreign investors. Although masala bonds are denominated in rupees, the repayment is in hard currencies, such as the US dollar, and the exchange rate risk is borne by the subscribers of the bond, and not the issuer.

“Masala bonds are non-sovereign, that is why in many of our mandates we are refraining from them even though the quality of the issuers may be high. We are focusing on sovereign and supranational bonds,” said Schlotthauer.

Of late, Deutsche Asset Management Investment has been seeing a larger participation of African countries in the emerging market sovereign bond category (dollar-denominated). Historically, Latin America has a high weightage of around 38 per cent in the commonly-used emerging markets bond index for sovereign dollar-denominated bond, followed by Eastern Europe, which has a weightage of around 26 per cent in such index. 

“The latest change in the emerging markets universe in sovereign and quasi-sovereign bonds in US dollar has been that the share of Africa has been growing in the past years. If you take a standard bond index for sovereign bonds, there were only a few countries from Sub-Saharan Africa in the index about seven years ago. Since 2011, we saw several African sovereign issues in US dollar, so now we have over 10 countries as part of the index,” said Schlotthauer.

In the commonly-used index for dollar-denominated sovereign bonds, for both India and China there are only quasi-sovereign issuers in the index. The index weight of China is at 4.2 per cent, while for India it is 0.8 per cent. 

“India has a weight below Sri Lanka, which has a weight of around 2.1 per cent. It is not that India is less attractive, but is just that there is lower availability of investable bonds, resulting in lower weightage," said Schlotthauer.

In the corporate bond market, India remains a top priority for Deutsche Asset Management Investment. 

“Within global Emerging Market Corporate Bond universe (as reflected through one of the most commonly used index), the weight of Indian corporate bonds is around 4.7 per cent, and this will be our sixth-largest market, the largest being China. Given the improving macro environment in India, there is a favourable demand-supply backdrop to Indian corporate dollar-denominated bonds,” said Kumar Vikalp, portfolio manager, emerging markets credit, Deutsche Asset & Wealth Management Investment. 

“Post global financial crisis, amid an environment of slower global growth and major central banks’ accommodative policy, there is a good demand for high yielding fixed income instruments with healthy underlying credit quality. An Indian sovereign US dollar bond issuance will be received favourably by investors including us. It will be a good anchor for the Indian quasi sovereign and high grade corporate bond space,” he added.

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