Infrastructure Development Finance Co (IDFC) is selling 10-year bonds after Indian Overseas Bank issued 15-year debt, as the country seeks to spend $1 trillion to build roads, railways and power plants.
Constituted to fund energy and road projects, Mumbai-based IDFC said it planned to raise Rs 2,930 crore ($640 million) by February 4 through 10-year tax-exempt bonds. Public lender Indian Overseas Bank sold Rs 925 crore of 15-year nine per cent bonds earlier this month.
“India really needs to develop a bond market for long-term funding,” said Michael Queen, CEO of 3i Group, Europe’s biggest publicly traded private equity firm, which is planning a $1.5-billion fund to invest in the country’s infrastructure over the next six months. “My biggest concern when investing in India is the availability of debt capital.”
The Reserve Bank of India (RBI) raised interest rates seven times in the past year to stem inflation, driving corporate funding cost to a two-year high. IDFC bonds maturing in September 2025 have yielded 9.4 per cent, up 39 basis points (bps), or 0.39 percentage point, since October, and 455 bps more than the 4.85 per cent on China’s Ministry of Railways bonds due in October the same year.
India’s corporate bond market, about 30 per cent the size of China’s, is failing to expand at a rate analysts say is required for the government to meet its infrastructure target. India has about $200 billion of bonds outstanding compared with China’s corporate bond market of $614 billion, according to figures by the Asian Development Bank.
‘Ambitious program’
Prime Minister Manmohan Singh proposed about $1 trillion of investment in the five years through 2017 to upgrade the country’s crumbling road and power networks, which the finance ministry says shaves two percentage points from growth. Singh plans to raise about 50 per cent of the spending from private financing.
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“The success of the government’s very ambitious infrastructure program hinges on developing an adequate bond market,” said D H Pai Panandiker, president of RPG Foundation, an economic policy group in New Delhi. “There is a desperate need to develop this.”
RBI Deputy Governor Subir Gokarn told reporters in December the central bank would focus on developing the corporate bond market.
Huge need
“Our infrastructure investment needs are huge,” Governor D Subbarao had said in November. “Infrastructure, by its very nature, needs long-term finance, and volatile flows chasing short-term returns do not meet the need.” Elsewhere in Indian markets, the rupee approached a seven-week low last week after overseas investors pulled funds from the country’s stocks and the central bank governor warned the current-account deficit was unsustainable.
The rupee dropped 0.4 per cent to trade at 45.76 a dollar on January 28. Data from the market regulator shows overseas investors pulled $755 million from Indian equities this month, the most since May.
The yield on government’s 7.8 per cent bond due in May 2020 slid 20 bps in the two-month period ended December to 7.91 per cent. The note has since trimmed the gains, with the yield at 8.13 per cent on January 28.
Government bonds of Asia’s third-largest economy lost 0.4 per cent this month, the fourth-worst performance among 10 local- currency debt markets outside Japan, according to HSBC Holdings Plc indexes.