Foreign investors flock to India’s corporate debt market ahead of domestic government securities’ debut on global bond index

As domestic government securities are set to debut on a global bond index next month, foreign investors are taking keen interest in the rupee-denominated corporate debt market in India, according to recent data.

Although current investments remain tepid, experts believe that there will be an uptick as more foreign investors have started taking more interest in these Indian debt instruments, traditionally ignored so far. Foreign investors preferred to invest in government bonds rather than debt securities.

"We have seen increased interest in Indian corporate bonds from global fixed income investors as they get more engaged in Indian markets," said Siddharth Bachhawat, head of markets at Barclays India.

Market participants are hopeful that the inclusion of Indian government bonds in the JPMorgan Emerging Market local currency debt index from June 28, would pave the way for passive inflows of around ₹2,500 crore ($25 billion), as a result.

Overseas investors have bought a net of ₹8,000 crores in rupee-denominated corporate bonds so far in 2024. They mostly sold these bonds for the last six years until 2023 amounting to a total of ₹1.06 trillion, revealed depository data.

According to traders, short-term bonds issued by state-run entities like REC and PFC have seen an upward buying trend, while some experts anticipate improved liquidity as well. Even though there is no liquidity in the high-yield Indian corporate bond market, the inclusion of the index next month would facilitate more flow, believes Hui Sien Koay, lead index, fixed income strategist for APAC at BlackRock.

Due to the growing interest of overseas investors, even some foreign fund managers are looking to launch ETFs focused on Indian corporate debt.

"We have been talking to investors about Indian corporate bonds and maybe this would be the next fund in our India series. We might be looking at an Indian corporate bond fund potentially, depending upon the success of the IGB fund," Jason Smith, CIO at UK-based Tabula Investment Management.

Investors have also taken interest in dollar bonds of Indian companies apart from rupee bonds, since the start of this year, with companies having to pay lower interest on bonds than their initial guidance.