India

Overview of the key factors that impact investment decision-making in India and highlighting the various investment instruments that are locally available.

Liquidity spotlight: India

Concise guide for corporate treasurers investing in India

Market scale and scope

Debt market instrument volume traded $2,115,000 (CY 2021).
Assets under management (AuM) of the Indian mutual fund industry 38.90 trillion rupees at 31 January 2022. Total AuM by mutual fund industry constitutes around 24% of the deposits held by the banking industry.

Key stakeholders

Reserve Bank of India (RBI) – India’s central bank.
Securities and Exchange Board of India (SEBI) – primary regulator for all funds and asset management and credit rating agencies.
Association of Mutual Funds in India (AMFI) – trade body for mutual funds sector.
Main credit rating agencies in India: Brickwork Ratings, Credit Analysis and Research Ltd (CARE); Credit Rating Information Services of India Limited (CRISIL); Fitch Ratings India Private Limited; Investment Information and Credit Rating Agency of India (ICRA); ONICRA Individual Credit Rating Agency of India; and SMERA.

The liquidity fund industry in India has grown significantly since the first liquid mutual fund was launched in 1997. For corporate treasurers considering investing in the Indian market, it is important to be aware of some key differences between more widely used international money market funds (MMFs) and domestic Indian rupee funds. Ensuring that locally domiciled funds fit within the risk parameters of existing treasury policies and align to treasury objectives is key, in order that they efficiently support a corporate’s strategic objectives in India.

Country specifics

There are a range of different fund types in India that fall under the broad banner of ‘liquidity funds’. For international investors the naming conventions of these funds can be confusing when compared with those in Europe or the US. For example, in India there are cash funds, overnight funds and MMFs, each with different features and risk profiles.

Portfolio characteristics – In India, most treasuries (local as well as global corporations) tend to use overnight funds or cash funds, as appetite for volatility has reduced. Overnight funds tend to run minimal interest-rate risk other than the small amount of extremely short Treasury bills (T-bills) they might tend to hold for efficient management of overnight reverse repo margin purposes (a recent development). Credit risk is overnight risk. Cash funds invest in debt and money market instruments with a maximum tenor of 91 days, which tends to be shorter than the global standard of 365/397 days. However, from a valuation perspective, all instruments are daily mark-to-market and hence subject to market risk.
Credit ratings – International funds are typically rated using an MMF rating methodology by one or more of the global credit rating agencies (CRAs), such as Moody’s, Standard and Poor’s and Fitch. By applying their standard ‘international rating scale’, an effective comparison can be made of credit strength across issuers in different countries. The rating scale and methodology used for domestic issuers in Indian rupee liquidity funds only relates to issuers domiciled in India and is therefore only a comparison of credit strength of issuers in the domestic Indian market. While the symbology (ie letter-based ratings) used is similar, no comparison can be made across the different scales and methodologies. Below is an example of two issuers that have both an international and local rating:
- State Bank of India is rated domestically AAA by ICRA and globally Baa3 by Moody’s.
- Power Finance Corporation is rated domestically AAA by ICRA and globally Baa3 by Moody’s.
Asset pricing – As a result of market reforms, all instruments in a money market or bond fund in India now have one common price. “This is unique to India and a significant improvement, as prior to this it was fairly common for a bond to have different prices from different fund houses, thereby making performance comparisons difficult, unlike in the equity space.” Gordon Rodrigues, CIO – liquidity, Asia-Pacific HSBC Global Asset Management (Hong Kong) Ltd.
Charges – On cash funds a graded fee is imposed as an exit charge if investments are redeemed within seven days. Exit charges do not apply on other types of liquidity funds. This also levels the field, given the minimum seven-day lock-in for term deposits in the banking system.

Portfolio instruments

Indian liquidity funds can invest into a range of money market securities, which corporate treasury functions are not typically able to access directly, largely for operational reasons such as requiring a custodian to settle the securities. Among the other benefits to corporate treasurers, investing in a liquidity fund can offer indirect exposure to these instruments.

Types of Indian liquidity mutual funds

Corporate treasurers considering investing in Indian liquidity funds need to look beyond the naming conventions (which can be confusing) to understand the significant differences with international liquidity funds. In particular, treasurers should carefully consider duration, the maximum tenor of the securities the fund can purchase, and the maximum weighted average maturity (WAM).

Identifying the right fund manager

In their investment manager selection process, it is incumbent on treasurers to identify those fund managers that can demonstrate an investment philosophy that is aligned with their own risk appetite. Alignment will be evident in the investment guidelines set by an investment manager to govern all aspects of the portfolio management, from asset types and issuer concentration to duration and liquidity requirements.

While investment guidelines should always follow the prevailing regulatory framework, some managers will go beyond the regulatory constraints and offer a more conservative fund than the regulation requires.

Fund manager differentiation criteria include:

Frequency of disclosure: SEBI requires reporting every two weeks, while some managers offer more frequent reporting, such as weekly disclosure.
Credit concentration: SEBI requires concentration to a single bank group to be limited to 20%, and to individual banks within that group to 10%. Some fund managers may set a more prudent limit, for example, setting limits based on local credit ratings that are more restrictive than those set by SEBI. As a result, these managers may limit the fund exposure to a single bank group rated AA+ to 15%, with not more than 5% in any single entity; and for those with a rating lower than AA+, the exposure would be 5% at group and entity level.
Weighted average maturity (WAM): SEBI sets a maximum of 91 days for cash funds, and fund managers may choose to operate with a significantly lower WAM of, say, 60 days (which is closer to international standards).
Provision of technology capabilities and tools: The extent to which a fund manager may facilitate straight-through processing and other techniques that reduce manual intervention, improve controls and simplify reporting.
Liquidity risk management: Liquidity ladders may vary across managers, and in recent years SEBI has imposed minimum liquidity requirements on investment managers to improve the reliance of liquidity funds. In early 2020, SEBI introduced an overnight liquid assets ratio called liquidity ratio-redemption at risk based on the investor size and concentration profile of the fund. This percentage needs to be maintained in overnight assets, including government bonds and T-bills. Furthermore, as recently as December 2021, SEBI introduced a 30-day asset requirement via a similar ratio called liquidity ratio-conditional redemption at risk. “These changes bring market convention in India more in line with our own internal guidelines on liquidity management, which are typically more conservative than required by regulation and another step towards regulatory parity between India and European domiciled funds,” says Gordon Rodrigues, CIO – liquidity, Asia-Pacific HSBC Global Asset Management (Hong Kong) Ltd.

"Our approach to liquidity management remains broader than regulation dictates, including asset type guidelines, imposing a maximum tenor a fund can hold in an asset type based on the liquidity of that instrument in the market, and targeting individual client and client sector concentration limits"

Gordon Rodrigues

CIO – liquidity, Asia-Pacific HSBC Global Asset Management (Hong Kong) Ltd

Market developments

Environmental, social and governance/sustainable investments

While environmental, social and governance (ESG) funds make up just 1% of total MMF assets, sustainable investment solutions continue to grow broadly across all asset classes and now represent approximately one-third of all global assets under management. Investor appetite varies from region to region, and across Asia ESG interest remains low by comparison. Where it does occur, it is typically from US- or European-headquartered companies that have a top-down approach, imposed on local treasury centres in the region. Interest in sustainable investments is likely to grow – especially given the 2021 announcement that India would achieve net-zero emissions by 2070.

Global bond index inclusion

Just as China did two years ago, India is hoping to join the global bond indices in 2022. Inclusion is not just beneficial from a macroeconomic standpoint, but for Indian companies the potential uptake in foreign capital inflows into the government bond market will see overall costs of borrowing falling, helping local companies with their capital requirements. Foreign investors will be able to access a substantial, diversified pool of Indian corporate issuers that previously may have been overlooked or inaccessible.

Gordon Rodrigues

CIO – liquidity, Asia-Pacific | HSBC Asset Management (Hong Kong) Ltd

Gordon Rodrigues is the Chief Investment Officer for the Liquidity Business in A-Pac. Prior to that he was the Head of Asian Rates, FX and Liquidity in the Asian Fixed Income team within HSBC Asset Management in Hong Kong. He has been working in the financial industry since 1992. Rodrigues joined HSBC Global Markets, India in 1994 as a Treasury Sales Specialist covering Corporate and Institutional Clients and traded Credit Products on the Fixed Income Trading Desk from 1998-2002. Gordon moved to HSBC Asset Management India in 2002 to set up the Fixed Income Investment Team and headed the team till 2007 before relocating to Hong Kong.

Prior to joining HSBC, Rodrigues worked as a Foreign Exchange & Fixed Income Dealer at Merwanjee Securities in Mumbai. Rodrigues holds a Master’s degree in Finance and a Bachelor’s degree in Electronics Engineering, both from the University of Mumbai (India).