The move to internationalise rupee bond issuances can be seen as a step towards full currency convertibility. It could also lower the cost of capital, over a period of time, which remains one of the highest in Asia. To date, International Finance Corporation (IFC) has sold INR106bn (or USD1.7bn) Indian bonds to international investors. The bonds ranging in tenor from three to 10 years are likely to create an international AAA yield curve for offshore rupee markets.
There are benefits for an issuer, since borrowing in local currency overseas does not carry the currency mismatch risk or refinance risk which is present in foreign currency denominated debt. Currency mismatches result in the ballooning of interest and debt obligations in the event of a depreciating rupee. Indian corporates have become increasingly dollarised in the past seven to eight years and currency risk is one of the key concerns for corporate India's performance. Thus, any reduction would aid corporates better manage their balance sheet risks in an increasingly volatile global environment. Hedging currency risks carry significant costs which may make foreign currency offerings lesser attractive especially at the lower end of the credit curve.
Likewise there are benefits for an investor, due to attractiveness of yields and a stable/appreciating currency which define the attractiveness of any offering. The rupee has performed better than other emerging markets, given sound macroeconomic management and inflation targets set by RBI in the last one year. India presents among the highest yields within Asia as well. A rupee offering overseas also addresses the concerns on disclosures for corporates in India. It will also take care of the legal jurisdiction issue in case of arbitration as any such matters would be settled in the foreign jurisdiction compared to Indian laws which invariably lead to protracted delays.
Momentum in offshore rupee bonds may be slow in the short-term, and issuers accessing the market would be mostly public sector undertakings (PSUs) and AAA corporates/banks testing the waters. Our analysis of some of the BBB (foreign currency rating) category countries suggests limited offshore local currency issuances beyond the government and quasi-government and the market is not as deep and liquid. China with its dim sum bonds is a clear exception to this trend.
Ind-Ra believes that corporates may have to offer a pricing premium initially to attract investors, though ideally the benchmarks should be close to the domestic market. This is because in addition to the traditional interest cost, investors may look at some component of the cost of hedging. Some issues relating to withholding and capital gains tax issues still need to be clarified before this market kicks off.
Nevertheless, firms may still choose to issue debt in global currencies as observed empirically, either because investors may demand higher interest rates for dealing in home currencies or because debt in home currencies could fail to generate demand.
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