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The international and domestic capital markets currently provide multiple opportunities for Indian companies to rationalise their capital structure. This comes in the backdrop of low interest rates, the US economy reporting optimistic data, buoyant global capital markets amid strong liquidity and less negative news emerging from Europe.
Back home, the improving fiscal situation and reducing current account deficit are leading to increasing commitments from foreign institutional investors (FIIs). With inflation and the fall in rupee's value getting under control, the rate cut cycle seems to have gained momentum. Indian G-Sec yields have rallied to their three-year lows. With reducing subsidy bills, favourable commodity prices and focus on reforms, we see the government pushing for revising India's credit ratings.
These factors give Indian issuers a phenomenal opportunity to access dollar / international capital resources at historically low borrowing costs.
International bond issuance in 2013 so far has been $9.3 billion. This has already exceeded the $9.1 billion raised in 2011, and within touching distance of the $9.8 billion raised in 2012. Around 15 issuers have accessed global capital this year. Notable debut investment grade issuers include Power Grid, HDFC, Bharti and ONGC, while Rolta India recently made its high-yield debut. Several marquee corporate names have started tapping alternate markets such as Singapore dollar, while Exim Bank successfully accessed the Euro-Aussie market, a first for Indian issuers. The interest in Indian high yield also seems to be building up with this market offering value versus other funding options.
I am also seeing the first signals of the investment cycle starting again. Financing such massive investments requires review of some policies and adoption of innovative means. One such idea is Infrastructure Debt Funds. Further, the Cabinet Committee on Investment is expediting decisions on approvals / clearances for implementation of projects.
With the government showing determination to mend its finances, Indian Inc should look at its capital structure to position itself for the next investment cycle.
From an investor perspective, this is a good opportunity to return to the markets with significant potential of making good returns. From a retail investor perspective in India, with interest rates headed lower, it would be an opportune moment to lock in higher yields in fixed deposits and bonds and expect capital appreciation, especially in longer duration investments as the market expects the benchmark G-Sec rates to head further south to 7.25 per cent levels during FY14.
For an international investor, when global rates are low, India offers a good yield pick, making it a smart investment destination for real money or hedge fund investors. The government is facilitating flow of such capital by announcing lower withholding tax rates - five per cent as against 20 per cent.
With wholesale inflation coming down from the eight-nine per cent zone to below six per cent and expectations of further drop, one can expect the central bank to respond with more rate cuts. Retail participants in income and long duration mutual funds can expect higher returns from their investments. Those who save through fixed term deposits of banks and companies should look to lock-in current rates for longer time periods.
Key risks to these expectations of lower interest rates in the near term are a sharp rise in commodity prices, specially crude oil, or announcement of general elections within 2013.
The author is head, capital markets & treasury solutions and co-head, corporate finance, Deutsche Bank AG, India. Views expressed are personal
