For Indian junk bonds, it’s love in the time of Evergrande

Home loan issuance by all, except top-rated borrowers, has shrunk since the collapse of IL&FS Group, a leading infrastructure financier, in September 2018. Firms rated below AA have earned just Rs 382 billion ($5.2 billion) this year, a far cry from their earnings of Rs 2.1 trillion in 2017.

The situation in the international market is just the opposite. Junk-rated non-financial firms from India earned a record $9 billion this year, nearly three times more than the year-ago period. JSW Steel Ltd alone raised $1 billion last month. Tycoon Gautam Adani has also outperformed historically trusted public sector issuers, such as Power Finance Corp and Export-Import Bank of India. Firms linked to Asia’s second richest individual have raised $9 billion in the past five years, more than any other Indian borrower.

It is wise for investors wary of China to look to India. At over $300 billion, China Evergrande Group’s liabilities alone are more than twice the size of India’s overall corporate bond market. While no one knows which sector or private business in the People’s Republic will be punished by Xi Jinping’s “shared prosperity” campaign, foreign investors have a fair view that Indian corporate groups have good relations with Prime Minister Narendra Modi’s government.

Nevertheless, policymakers in New Delhi and Mumbai would prefer to raise funds locally in their home currency. After all, they’re running a fully stocked liquidity bar, with surpluses in the banking system between $90 billion and $130 billion since the end of June. This is a risky move. India’s happy hour may not go on indefinitely, with the Federal Reserve mulling liberal monetary support for the pandemic-hit US economy. To boost anemic investment and jobs, officials want increased credit. But how long can they wait when the easy money is only going to more equities? Bank loans to the corporate sector, barring the local bond market, are also refusing to budge.

The central bank may point to 5.3% inflation within its target range to defer the inevitable tightening at its monetary-policy meeting today. A rise in global oil prices is believed to hurt a country that imports most of its energy. A severe shortage of coal at power plants could lead to inflation as steelmakers pay more for the commodity. It could also add to the record September trade deficit of about $23 billion. The reassuring news is that India has around $650 billion in foreign exchange reserves and HSBC Holdings Plc is expected to remain in surplus for years that there is not an overall balance of payments. Knowing that the sudden depreciation of the rupee is unlikely to lose their money, foreigners may flock to India’s stocks and bonds.

But the extra dollars come with a cost. A rupee that is too strong against the inflation-adjusted currencies of trading partners suffers a loss of competitiveness. This is probably what is happening in India. In a variant of the Dutch disease, an overvalued rupee could hamper domestic manufacturing and growth in jobs, says Anant Narayan, analyst at the Observatory Group.

An increase in gold imports is often a sign of panic. Some of the increased demand can be attributed to jewellers. With the virus retreating, they are stocking up for the Hindu festive season, which has just begun. But could it also be that after making their money in stocks, rich Indians are buying the yellow metal and bitcoin because they know the ultimate source of demand in the economy is weak, and that the currency is artificially high?

Till the time the rupee does not fall, India will get some capital by running away from China. But in the time of Evergrande, love is not forever. The local credit market needs to be a little less grumpy. Once the Fed starts shrinking its balance sheet, the moment may be lost.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for The Straits Times, ET Now and Bloomberg News.