The Reserve Bank of India (RBI) is toying with the idea of letting Indian companies raise rupee debt overseas.
Indicating this in its first bi-monthly Monetary Policy Statement, 2015-16, the RBI said, “A few international financial institutions were permitted to issue rupee bonds in overseas markets, subject to certain conditions. These issues have been received with interest.”
“The appetite for rupee debt amongst international investors is a welcome development,” it added. In view of this, the RBI was planning to expand, in consultation with the Government of India, the scope of such bond issues by the international financial institutions. Also, it was considering to permit Indian corporates eligible to raise external commercial borrowing (ECB) through issuance of rupee bonds in overseas centres with an appropriate regulatory framework.
The move to let corporates issue rupee debt offer could have twin beneficial fall-outs. For one, it could help contain foreign currency-denominated external debt obligations. For another, it could pare the risk arising out of unhedged foreign exchange exposure of Indian companies.
“We are going to open up the possibility of Indian corporations issuing rupee bonds abroad. Now that is a big thing because lot of investors want to come to India to buy corporate bonds today. We are going to allow large corporations to issue abroad so that the paper can be traded abroad,” said RBI Governor Dr. Raghuram Rajan while addressing a press conference.
“Now this will come under the overall ECB window to some extent because in a sense we are replacing people having to borrow in dollars to people being able to borrow in Rupees and not then having to hedge it,” said Dr. Rajan, adding, “This is, I think, a big development. We already have institutions like the IFC, the World Bank thinking of issuing these bonds. Why not our corporations? So, that is a movement forward.” said Dr. Rajan.
“For corporates getting ECBs in term of rupee bonds is going to be a big advantage as they will be able to raise funds without taking the currency risk,” said Riaz Thingna, Partner, Walker Chandiok Co. LLP. Having said that, the interest rates, which the investor would expect will be comparable to the domestic interest rates, “which means that the interest rate arbitrage will not be available if a corporate takes this route of funding.”
It has to be seen whether such bonds will find ready buyers in various countries given that the rupee is not completely a negotiable currency. However, it is a positive step as it will have greater leverage to companies in need of funds as this option will not require sophisticated treasury function.
“With this option, Indian corporates will be able to raise funds even without RBI bringing down interest rates and in most cases there will be an interest rate advantage as compared to banks’ prime lending rates,” Mr. Thingna added. Even a smaller corporate borrower will be able to use this funding option.
