Speak to any India-focused DCM banker and they will tell you how much effort they have put in trying to convince the sovereign to sell a dollar bond over the years. Their efforts have, so far, come to nothing.
The closest India came to an international bond was in July last year, when finance minister Nirmala Sitharaman said in her maiden budget speech that the sovereign would turn to international bond markets for financing. The immediate excitement among bankers and investors was clear — but so were the criticisms that followed.
The dissent, for the most part, came from prime minister Narendra Modi’s core Hindu nationalist supporters, who viewed selling a global bond as putting the interests of international markets over India’s own interests. There were also legitimate concerns over excess foreign currency debt exposure, which could become expensive for India if the rupee depreciates.
Investor support was not in doubt, with global investors keen to take exposure to the south Asian country, given the dearth of deals from India and the yield pick-up the sovereign’s notes would likely offer over peers. There is no reason to think support has waned, even as the country has dealt with the fall-out of the coronavirus.
The time is now ripe for India to put a dollar bond back on its agenda. The benefits are many — provided the ministry of finance plays its cards right.
India shouldn’t restrict itself to selling a plain vanilla deal. Instead, it should aim bigger with a Covid-19-linked transaction. By doing so, it has a higher chance of bringing together the various parties that are against an international offering, by uniting them for a common cause.
The rationale is clear. India, home to 1.35bn people, is among the countries worst hit by the coronavirus. As of Monday, it had reported about 2.6m cases of Covid-19, of which more than 600,000 were active cases. Nearly 51,000 people have died so far, according to government data.
India’s economy has come under pressure, with real GDP growth this financial year predicted to be in negative territory. The finance ministry announced a roughly $22.5bn stimulus package in March to cope with the coronavirus impact, but economists think the country will need more than that to soften the impact of the pandemic.
By tapping international capital markets with a Covid-19 response bond, India can ease some of its funding pressure to combat the pandemic. But such a deal could also give India bragging rights – making it the first Asian sovereign to sell an explicit Covid response bond.
Indonesia, the Philippines and Thailand have taken a step in that direction. When Indonesia sold a $4.3bn triple-tranche deal in April, some of the proceeds were earmarked for Covid-19 relief efforts. The Philippines said it will use its $2.35bn bond, printed in April, for general corporate purposes, but made it clear that tackling Covid would be key. The Kingdom of Thailand debuted in the sustainability bond market onshore last week, with Bt20bn ($636m) of the Bt30bn deal specifically going towards mitigating the impact of the coronavirus.
But none of these countries explicitly labelled their deals as Covid response deals — meaning there is a possibility of less transparency around where the bond proceeds actually go.
India should address those concerns by clearly tagging its bond outing as pandemic linked and making absolutely clear to investors how the money will be used.
One big mistake India made last year was setting its sights on a hefty $10bn from the international market. To find success this time around, it should temper its expectations on size. Even a $1bn Covid-19 deal can go a long way in establishing India in the bond market — offering a benchmark for the country’s quasi-sovereign and corporate issuers while answering fears about currency exposure.
Market conditions will be in India’s favour. A host of Asian corporations and financial institutions have managed to price their bonds at aggressively tight levels in recent weeks. India will have an added advantage of scarcity value, despite ratings downgrades this year to Baa3/BBB-/BBB-. It can also appeal to investors increasingly focused on the ESG agenda amid the pandemic.
The Indian government undoubtedly needs to ramp up its fight against Covid-19 — and tapping international capital markets to support that battle is a question of when rather than if. The time is now.