India lifts foreign debt limit
FTfm (Financial Times)
22 February 2009
The Indian government has more than doubled the limit on foreign debt investment in a bid to attract more overseas money to help fund its stimulus package. The limit has increased to $15bn (£10.5bn, €12bn) from $6bn.
“From a policy perspective, external debt is not what you want, but money is available cheaper outside [India],” said Shyam Kumar, chief executive of Kotak Mahindra UK Ltd., a subsidiary of Indian bank Kotak Mahindra.
Access to the Indian debt market is not necessarily straightforward as only investors of Indian origin or registered foreign institutional investors (FII) are allowed to put money in. One way of circumventing the bureaucracy is to invest with an FII, such as Kotak Mahindra, which is launching a fund of funds to take advantage of the new opportunity.
The value of Indian government debt outstanding is about $280bn, while corporate debt adds another $500bn to the fixed income market. Mr Kumar cautions the latter is very illiquid, however.
Until a year ago, the limit for foreign investors was $3bn. It doubled to $6bn in September, with the latest increase announced this month. There has been no guidance on whether the limit will be raised again in the future.
The Kotak Mahindra fund will charge 50 basis points with underlying funds having total expense ratios of up to 1.5 per cent. Mr Kumar said yields for 10-year corporate debt were around 7 or 8 per cent, and expects active management to add as much as 200 basis points on top of that.
“Most corporates are underleveraged and default rates are very, very low,” he said. In contrast to more developed markets, relatively few Indian companies have issued debt and even fewer have defaulted.
Although the Indian economy has been hit by the global downturn, Mr Kumar said growth of 7 per cent was forecast for this year. At the same time, inflation has fallen to 4 per cent from 12 per cent, making fixed income more attractive.
Investor interest in the Indian story can be seen in the equities market. Of the 30 to 40 per cent free float equity available for investment, Mr Kumar estimated over half was held by foreign investors. With elections in May, however, he predicted equities would not recover until the shape of the future government was clear
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