One of the main emerging market economies, India, continues to have a bond market that is underdeveloped away from its actual potential, and reforms are needed, a business association says.

India's fixed income market has grown but the country has been left trailing in China's wake, and measures such as easing curbs on foreign investors should be taken, a report says.

The Asia Securities Industry & Financial Markets Association in late July issued a report, India's Debt Markets: The Way Forward, written by five of the association's member firms: Clifford Chance, JP Morgan, Juris Corp, Nomura and PwC.   

The report calls for greater liquidity and benchmark issuance across the yield curve and not just in on-the-run maturities; more work to deepen and expand corporate debt markets and the creation of a repurchase (aka "repo") market to assist market infrastructure. It also says more development is needed of the Indian offshore bond (aka "Masala bond") market by easing issuance curbs. Quotas on foreign investor access to the market should be streamlined and the taxation of foreign investors should be rationalised.

“Ever since India’s burst of economic reforms starting in the early nineties, there has been a metamorphosis in the Indian capital markets, which have seen impressive growth across several dimensions,” Mark Austen, chief executive of ASIFMA, said.

The report comes as emerging market economies are competing for foreign capital. China has taken a number of steps to open up financial markets. India, while it has made some moves is still a relatively protected market.

It has been noted (The Hindu, 24 October, 2016) that in the corporate bond sector for example, market penetration is low in India. At the end of 2015 while corporate bond penetration in India was at around 17 per cent of GDP, the figure was close to 45 per cent in Malaysia and 75 per cent in South Korea.

In August last year, India’s outgoing central bank governor Raghuram Rajan unveiled a “mini bang” of liberalisation aimed at boosting the corporate bond market (source: 26 August, 2016, Financial Times). The policy shift is designed to allow banks to use corporate bonds as collateral for the central bank's overnight repo credit facility and to issue offshore rupee-denominated “masala bonds”, while also giving foreign investors direct access to Indian bond trading platforms.

Impediments
The ASIFMA's Austen went on to say: “However, the various structural impediments - ranging from the more visible physical infrastructural constraints to the less visible institutional, social, legal, regulatory and governance deficits - have collectively impeded the further development of the Indian markets."  

"In fact, this impact has been so significant that even though growth rates and the progress in Indian capital markets in absolute terms might appear to be impressive, they have been outpaced by even faster capital market developments – particularly in the fixed income space – in the other regional emerging markets, China in particular," he said.

The association previously examined India's bond market in 2013.