Robust economic growth and increasing cross-border investments are driving a surge in transaction activity in the subcontinent

India’s capital markets are thriving, providing businesses and dealmakers with an abundance of options for financing.

India is projected to be the fastest growing economy in the G20. According to ratings agency Moody’s, India’s year-on-year GDP growth will increase to 8% for the fiscal year ending March 2024, supported by high levels of capital expenditure and domestic consumption.

A buoyant domestic economy has encouraged high levels of foreign direct investment (FDI), with India’s government anticipating annual FDI inflows to exceed US$100 billion in the next few years.

In addition to its strong economic performance, India has attracted more attention from international investors who are seeking to diversify their Asia-Pacific investment portfolios. A great deal of this activity has been spurred by the desire of global businesses to adjust their risk exposure to China, which can be achieved by increasing allocations to other parts of the region, such as India.

Rising inbound investment has been complemented by a thriving domestic investment market. For instance, buoyed by the rapid growth of India’s middle class, the country’s mutual fund industry saw its assets under management (AUM) double in just four years between 2020-23.

Local capital markets shine

India’s capital markets have surged on the back of these rising flows of international and domestic investment.

On the equity side, India is ranked as the most active market in the world for initial public offerings (IPOs) in 2023, recording more IPOs than any other region. A total of 57 Indian companies launched mainboard IPOs last year, up from 40 in 2022, according to capital markets data provider Prime Database. Consequently, the total market capitalization of India’s stock markets rose to around US$4 trillion for the first time, surpassing Hong Kong to become the seventh biggest market in the world.

Debt capital markets have also performed impressively, with global investors demonstrating their appetite for opportunities to increase their exposure to India’s sovereign bonds. Demand is expected to remain high, with India set to join JP Morgan’s emerging market bond indices for the first time in June 2024. This is forecasted to drive between US$25 billion-US$26 billion of additional inflows into the Indian bond markets.

India’s banking sector is also on firm footing. Moody’s notes that the country’s banks are well capitalized and have the option to raise additional capital on equity markets if required. Banking profitability has also improved as loan-loss ratios have decreased.

Stability in the banking sector has supported a solid growth in lending activity, with India’s banks reporting credit growth of 23% in 2023, according to EY.

Options for borrowers

For companies seeking financing, stable capital markets and a healthy banking sector have provided borrowers with abundant liquidity and a wealth of opportunities to structure financing packages to meet their requirements.

Offshore dollar-denominated debt markets and local rupee-denominated debt markets have both been open for business. Domestic currency debt markets have been particularly active, given the high inflows of capital from international and domestic investors into rupee-denominated funds and assets. Moreover, as interest rates across global economies stabilize, activity in offshore dollar debt is projected to increase as well.

Borrowers are also benefitting from growth in the private credit market. Several international private market managers have opened offices in India to facilitate rupee financing for M&A transactions.

According to EY, private credit deal flow in India reached 108 transactions and was worth a combined US$7.8 billion in 2023, up from 77 deals worth US$5.3 billion in the prior year. Moreover, heightened activity levels are on the horizon. According to Bloomberg, market stakeholders believe private credit AUM in India (around US$15 billion as of December 2022, according to Preqin) could double within the next two years.

Feet on the ground

Despite the strong momentum driving India’s debt markets, the country’s credit fundamentals do not come without some risk. Thus, dealmakers must remain cognizant.

India goes to the polls this year, with a general election scheduled in Q2 2024. Investors will keep a close eye on the results and transaction volumes could cool in the lead up to the vote as market stakeholders await the outcome.

Further, in certain circumstances, international and domestic investors have also found it difficult to assess risk in this market as it has developed rapidly. For example, a series of failures involving non-bank financial companies (entities in India that provide loans but do not take deposits and finance their lending from wholesale debt markets) prior to the pandemic lockdowns still remain fresh in investors’ minds. Recently, high-profile Term Loan B (TLB) loans raised by Indian borrowers have either defaulted or traded at steep discounts.

The challenges that have faced non-bank financial companies and TLBs illustrate that while Indian debt markets are developing at pace, lenders and borrowers are still coming to grips with novel financing products. Complex TLBs, for example, are issued offshore, with the issuer entity based overseas even though the assets are located onshore in India.

India’s debt market is still in its maturation phase. New financing tools should be approached with care and only explored by issuers with a strong track record and risk management capabilities.

A bright outlook

Notwithstanding the challenges mentioned above, the outlook for India’s debt market is bright, with upside opportunities outweighing the risks.

Bond market participants, bank lenders and private credit providers are flourishing in India and are eager to provide financing to companies operating in one of the world’s fastest growing economies.

In addition to rapid growth, supportive regulation has also encouraged more investment into the country. Reforms to India’s Insolvency and Bankruptcy Code are one example of how such frameworks are maturing and providing international investors with the necessary protections and oversight to mitigate downside risk.

India is not only an in-demand emerging market, but it is also an increasingly sophisticated jurisdiction that is capitalizing on current tailwinds to build a solid regulatory and commercial foundation that will support sustained long-term growth.

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