RBI allows companies to sell rupee-denominated bonds in overseas markets

MUMBAI: The Reserve Bank of India on Tuesday moved in to liberalise the bond market, permitting companies to sell rupee-denominated bonds in overseas markets, which essentially shifts the exchange rate risk from the bond seller to the buyer.

The central bank, with this move, may be signalling a limited opportunity in expanding the role of foreign institutional investors in Indian bond markets.

"The appetite for rupee debt amongst international investors is a welcome development," RBI said in its policy statement.

"…it is proposed to expand, in consultation with the government of India, the scope of such bond issues by the international financial institutions as also to permit Indian corporates eligible to raise external commercial borrowing through issuance of rupee bonds in overseas centers…"

Overseas investors are allowed to invest $51 billion in Indian corporate bonds issues, and FIIs have already used 78 per cent of this limit. If domestic companies can raise rupee bonds offshore, local authorities are unlikely to raise the FII investment limit.

Currently, every corporate can raise up to $750 million via ECB automatic route, but it needs to seek approval for any sum higher than this.

"The initiative is a great step towards broadening the corporate bond market and reducing the dependence on domestic capital markets and banking system," said Arun Srinivasan, SVP-Investments, ICICI Prudential Life Insurance. "But we will need to wait for clarity on tenure restrictions, limits, etc. RBI would not want to create an arbitrage opportunity for foreign investors."

FIIs are barred from investing in any corporate bond in less than three-year maturities. If the same restriction remains, investors prefer the offshore platform.

Such bonds would be listed in offshore exchanges like the London Stock Exchange instead of NSE or BSE. But there's unlikely to be many takers for the rupee bond from companies as large institutional investors having an FII licence in India would not like to incur any hedging cost aimed at mitigating currency risk. Investors need to convert currency if such bonds are offered outside India.

In the domestic corporate bond market, an Indian company is exposed to currency risk when it sells bonds to offshore investors whom it needs to repay in foreign currency.

"The rupee bond move may be aimed at shifting unhedged risk from issuer to investor," said Sidharth Rath, who serves as the president of Treasury & Business Banking at Axis Bank. "Detailed guidelines are yet to come. This will be too early to conclude on the move’s success."

"It could be a matter of convenience for foreign investors who could trade rupee bonds on the London Stock Exchange (for example)," he said.

So far, multilateral agencies like the Asian Development Bank or World Bank’s private lending arm IFC sold rupee-denominated bonds last year for Rs 300 and Rs 1,000 crore.