Indian is back in favour. Spreads for Indian credits in the dollar market have tightened dramatically since the beginning of this year. Bank of India’s 3.625% 2018s bonds are trading at 230bp, 70bp tighter than where they were on January 15. The spread on State Bank of India’s 3.25% 2018s has narrowed 28bp to 212bp over the same period.
The resurgence in investor appetite for India is reflected in the fact that foreign institutional investors have pumped just over $2bn into Indian assets so far this year, the second highest inflow among emerging markets, according to data from Indian financial information provider IIFL. This contrasts with the $4.5bn of FII capital net outflows that happened last year.
Last year was a torrid one for the country, with investors making a run for the exit as they became plagued by worries about India’s skyrocketing inflation, sizeable current account and fiscal deficits and the effect of US Federal Reserve tapering on the country’s growth.
Last August, Morgan Stanley even branded India as a "Fragile Five" economy that was at serious risk of capital flight.
These worries have since retreated somewhat, after the Reserve Bank of India introduced reforms this year that helped to curb the country’s expanding current account deficit to 2% of GDP for the 2013-2014 fiscal year, the lowest in six years. The political crisis in Ukraine and weakness among other Bric economies, spearheaded by China and Brazil, also overtook concerns that investors had about India.
For now the tide has turned. The poll-driven expectation of a BJP-centered government emerging from the upcoming April elections is also driving investor optimism. A win by the Narendra Modi-led opposition BJP party is seen as something that would bring much needed structural reforms for India’s economy.
And Indian borrowers have been quick to take advantage. After seeing the turnaround in sentiment, IDBI, which had been monitoring markets since last year, launched its $300m 5.5 year 5% offering last week The deal ended up pricing 20bp tighter than initial guidance on an orderbook that grew to more than $2bn. Likewise, India Exim was able to price its $500m 5.5 year 3.875% issue some 25bp narrower than initial guidance, with a book that peaked at $3.2bn.
Shock result
These deals have a provided some good momentum for other Indian issuers to jump on board. But the country’s borrowers will need to move swiftly. This opportunity is unlikely to last long.
If the results of the upcoming elections diverge from investor expectations, spreads for Indian credits will certainly widen and wipe out the tightening they have achieved over the past month, according to economists. Fickle capital inflow from foreign institutional investors will quickly make a run for the door — just like it did last year.
And if history is anything to go by, Indian elections are far from predictable. Both the 2004 and 2009 elections delivered shock results. There is also the possibility that the hopes pinned on a potential BJP-led government may fail to translate into actual changes.
Rather than wait, Indian issuers should take advantage of the tightening spreads and the welcome respite they are offering investors from Chinese property companies — before it’s too late.
Indian borrowers, your time is now.