India's fixed income sector evolving

INDIA's decisive election outcome has created the potential for further structural reform that could result in a near 7 per cent GDP growth rate over the coming decade, and bank capital injections could enable banks to facilitate funding for that growth. This would have meaningful implications for India's fixed income markets. We believe the next decade for India's FX and fixed income markets will be marked by policy-driven reforms driving accelerated growth with increasing market liberalisation.

Recent figures already appear more encouraging than the dynamics that have been supporting stagflationary recession conditions: The country's balance of payments has improved, spurred by FX depreciation and the Reserve Bank of India's (RBI's) non-conventional measures; the growth outlook has turned moderately positive, helped by a global recovery; and bad loan formation, even at state-owned banks, may now be moderating. The narrative for Indian markets began to brighten even before the elections.

Following the second stage of India's economic liberalisation and the foreign direct investment (FDI) reforms initiated in September 2012, foreign investment will likely be a major contributor to a jump in private investment. However, despite liberal FDI limits, foreign investment in India has remained moderate - constrained, in part, by administrative hurdles.