India is seeing a strong appetite for infrastructure bonds as banks search for a way to boost their funding and benefit from preferential terms for their issuance.
There have been numerous issuances across the Indian banking industry, with the banks collectively raising Rs40bn ($478mn) in the four weeks to mid-July. State Bank of India issued its first infrastructure bond in June, with a 15-year maturity and coupon of 7.36 per cent, and the aim of raising Rs100bn. In the same month, ICICI Bank raised Rs30bn with a 10-year bond and a coupon rate of 7.53 per cent.
Bank of India issued Rs50bn of 10-year infrastructure bonds this month, priced at 7.54 per cent, marking the first time the bank has issued these bonds.
In total, India’s banks are expected to raise Rs400bn through infrastructure bonds in July and August, according to reports by Reuters. This would put the banks on target for the second consecutive year of recording-breaking issuances of infrastructure bonds.
The surge in infrastructure bonds has been driven by changing behaviour in the consumer banking industry, as banks look for new sources of funds. Vishal Goenka, co-founder of online bond platform IndiaBonds, says consumers have been in search of high yields, which has seen them move away from traditional bank deposits into investing.
He says this is exemplified by the increase in the number of Demat accounts — where share certificates and securities are held — which increased from 41mn in 2019 to 160mn in June 2024.
Issuing infrastructure bonds also comes with attractive incentives for the banks. The Reserve Bank of India allows banks to issue bonds with a maturity of seven years or above to raise funds for infrastructure projects. These bonds are attractive to banks as they do not count towards the bank’s liabilities, such as the statutory liquidity ratio and cash reserve ratio, while retail deposits do.
Pratik Dattani, founder of UK-based think-tank Bridge India, says the ambitious plans of the Modi administration over the past decade has resulted in a notable improvement of the country’s highways and railway stations. With it has come an “unprecedented” demand for assets including steel and cement. This has in turn led to demand for new bond issuances to finance these long-term projects.
“Public sector banks in particular don’t have the deposit growth to fund this demand for loans, so raising infrastructure bonds is the most tax-efficient way for them to raise additional funds to support the government’s ambitions,” says Dattani.
Goenka says for investors, such as pension and insurance funds, the creation of more long-term bonds is to their advantage, as traditionally bonds have not extended beyond 10 years. “For the insurance and pension providers, they are actually getting a good chance to diversify, to match the long-term liabilities and long-term assets from the public sector banks,” Goenka says. “It’s the perfect confluence where the issuer is benefiting through a cheaper way of raising deposits, and the investors are benefiting from diversifying away from government bonds.”
The government is also looking to crowd in private capital. Part of the current success, according to Dattani, is the signposting of its own intentions to invest heavily in infrastructure, and providing subsidies, giving investors certainty that the projects will be completed. “Without this certainty, the government would struggle to fundraise adequately because of little fiscal headroom,” he adds.
[JPMorgan including the country in its emerging market index] is a breakthrough moment for India
This rising bond demand has come in tandem with JPMorgan’s inclusion of India within its Emerging Market Global Diversified Index, something which analysts see as favourable for the continued growth of the bond sector. It is forecast that, with a 10 per cent weighting, inclusion on the index could attract $21bn in investment by the end of the first quarter of 2025.
“It is a breakthrough moment for India,” says Dattani. He adds that India has marketed its potential for some time. With markets like China and Russia falling out of favour, this has further drawn attention towards India.
“The positive market sentiment this is generating could help strengthen the rupee and it could help bring tens of billions of additional inflows into the country,” Dattani adds.
Arvind Subramanian, senior analyst for manager research at Morningstar, says: “India’s strong economic fundamentals — including robust growth, stable inflation, and extensive foreign exchange reserves — have bolstered confidence in the strength of its bond market. Additionally, the recent inclusion into the JPMorgan emerging market index is poised to enhance inflows into Indian sovereign bonds, potentially providing a tailwind for bond performance.”
While the move will bring in greater investment, there is a limit to how much foreign investors can contribute. “Opening up the local currency market to foreign investors via index inclusion enhances visibility in the market while also supporting inflows that could be used for development and other capex,” says Jennifer Taylor, head of emerging market debt at State Street Global Advisors.
“Fixed income investors gain access to a growth story with attractive yields. It’s a win-win for both sides. However, it is worth noting that the government bond foreign ownership cap at six per cent could limit wide-scale inflows,” she says.