RBI allows companies to issue rupee bonds abroad

Addresses depth issue, while helping contain foreign currency-denominated external obligation and reduce risk from unhedged forex exposure

Allowing companies to issue rupee-denominated bonds abroad will address both pricing and currency risks, while opening a window for rupee-denominated instruments to trade abroad.

The move follows robust demand for rupee-denominated bonds issued by the International Finance Corporation (IFC) and the Asian Development Bank (ADB).

"It will bring more liquidity and funds and since these are raised in the rupee, no hedging volatility is involved," said Rajeev Talwar, executive director of real estate major DLF.

Even large companies struggle to raise funds from the local debt market, mainly due to the short tenure of bonds (up to three years) and big investors like Life Insurance Corporation of India insisting on triple-A ratings. "There is no depth in the local debt markets," said Seshagiri Rao, joint managing director, JSW Group. "The equity markets get many tax incentives and India should extend these to the debt market. It's important for infrastructure and companies setting up large projects to have access to long-tenure loans; a thriving bond market will help companies."

Analysts say many foreign investors have shown interest in high-yielding Indian debt. The enthusiastic response to IFC and ADB's offshore bonds has now encouraged RBI to push companies into tapping the rupee bond market abroad. In November last year, IFC sold Rs 1,000 crore worth of offshore 10-year Indian currency bonds at nearly two per cent below the benchmark 10-year government bond. In August, ADB raised Rs 300 crore from an offshore rupee-linked bond issue, to be settled in dollars.

By allowing companies to issue rupee debt from abroad, RBI could help contain India's foreign currency-denominated external debt obligation and reduce systemic risks from Indian companies' large unhedged forex exposure.

Analysts say demand for such bonds would depend on hedging options. To spur hedging of forex exposure and enhancing the liquidity of the currency options market, RBI has proposed to permit exporters and importers to write covered options on the basis of actual contracted exposure. Only companies with underlying transactions can write such options. This will also hedge forex exposure automatically.

"The move will also increase the options market liquidity, lacking depth due to lack of counter-party availability. It is also expected that once exporters and importers both start writing options, there will be enough counter-parties to make this voluminous enough to get the critical mass," said Prabal Banerjee, president, international finance, Essar group.