Expanding horizons

Written by Praveen Jagwani
September 2013

UTI International CEO Praveen Jagwani explains why opportunities are arising within Indian fixed income investment

What is the background regarding investing in the Indian fixed income market?
Historically the Indian fixed income market has been quite a difficult one to access because the Indian government has traditionally never borrowed from external sources. Therefore global indices like J.P. Morgan Emerging Markets Bond Index do not have any allocation to India. However, India is the eighth largest economy in the world (third largest on PPP basis) and has the second largest population after China. Thus India is significant to warrant exposure. While access to Indian equities is relatively straightforward, you can’t get that in the fixed income space. This position became a bit more acute in the aftermath of the global financial crisis. When global interest rates were declining, in India, because of the domestic inflation, the rates were increasing. Things came to a head in 2012 when Indian interest rates were the highest in the world within investment grade countries. India is rated BBB- and is an investment grade credit. That’s when the world woke up and wanted some way to access this. Until 2009 the Indian government had a ceiling on how much global institutions could all put together to buy domestic Indian debt. That number was $20 billion. Progressively from then that number has been increased and today we stand at $81 billion.

How can pension funds access this market?
The process of accessing the market is quite complex. Investors seeking investment grade countries will find India attractive but they would require a FII (Foreign Institutional Investor) license to be eligible for investing. Furthermore, they would have to participate in monthly auctions to purchase the right to buy Indian sovereign debt or corporate debt. Once this right is acquired, you have a 30 day period to invest. Should you choose not to invest the right expires worthless. If you buy a bond and you sell it, your limit expires. If the bond matures during that time your limit expires, so most pension funds simply stay away. However, for the first time global interest rates have gone to such a low level that it examining the Indian opportunity becomes worthwhile. A 10 per cent interest rate is really attractive in rupee terms. Hedging the currency in USD terms, returns at present around 3 per cent p.a. In 2011 we gave the world its first taste of Indian fixed income by executing a closed ended one year product. In three weeks we raised $1 billion from 22 global institutions and that made history. The product was very well received, with some sovereign wealth funds, pensions and private banks. On the heels of that, the banks came to us and expressed a desire for something a little more investible on tap, in a format that is more acceptable to them. So we embarked on the brave journey of creating a Ucits fund. We launched the Dublin domiciled Ucits fund in December 2012, which probably, for the first time, gave the world daily liquid US dollar denominated access to the asset class of Indian fixed income.

What future changes do you expect to see within Indian fixed income?
We expect the cap on fixed income global investment figure to be closer to $100 billion by the end of the year. The country needs to grow and one of the more prudent ways to do that is to attract foreign investors. As long as the government makes it a little easier and contains the fall of the rupee, foreign investors in the search for yield, will beat down a path to India. Domestically, almost 80 per cent of the market is sovereign debt so it’s an easy decision to invest in the Indian domestic market. Since India is rated investment grade, its quasi-sovereign corporate paper also enjoys an investment grade rating. With the Indian rupee having collapsed in the past few weeks, we think, the risk is now, more on the upside. We have a new central bank governor, an ex-economist of the IMF, which should give a lot of confidence to the global investors.

Praveen Jagwani is CEO at UTI International

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