Less appetite likely for rupee-linked bonds abroad

Rupee-linked bonds issued abroad by Indian companies might not see good appetite from foreign investors at a time when they have been net sellers of debt, since May. Besides, experts believe taking into account the hedging costs, the attractiveness of these bonds further comes down.

The Reserve Bank of India (RBI) issued draft guidelines for rupee-linked bonds on Tuesday. These propose the price be set at not more than 500 basis points above yield on government bonds of corresponding maturity. More, investors in such bonds can hedge both the foreign currency risk and credit risk through permitted derivative products in the domestic market.

“These bonds will sail smoothly in an environment where there is good demand and appetite for Indian bonds. Currently, foreign institutional investors (FIIs) are showing a bit of disinterest in Indian papers, due to possibility of a US Federal Reserve rate rise this year. When this phase is over and bond yields come down, we can get a much clearer picture,” said Badrish Kulhalli, head of fixed income at HDFC Life.

According to RBI, Indian companies eligible to raise external commercial borrowing are permitted to issue rupee-linked bonds abroad. Banks incorporated in India will not have access to these.

So far this month, FIIs have been net sellers in debt by Rs 3,396 crore. There are concerns on the Street that encouraged by the US jobs data, which showed employers added 280,000 jobs in May, the most in five months, the US Federal Reserve might start a rate rise cycle sooner than expected.

If the two-day meeting of its Federal Open Market Committee on June 16-17 issued a hawkish forecast, there could be more FII outflows in debt.