What is the impact of the Asian Development Bank's rupee bond issue?

The debt mart gets its due

R H Patil
Chairman, CCIL, and former MD, NSE

The Asian Development Bank's (ADB) Rs 500 crore bond issue with a bullet maturity of 10 years is unique in several respects.

It is the first of its kind in India by an international lending institution, the debt of which is backed by the 63 member countries including the US, Japan and several other OECD countries.

This is its first issue in the domestic bond market of a developing member country. At least in this respect we have scored over China!

Insofar as the Indian bond market is concerned, it is as sound as the issue of the government and therefore one of the soundest in terms of its credit rating.

One of the primary objectives of ADB in raising rupee debt is to diversify sources its loanable funds from one of the regional countries.

When ADB lends rupees in India the borrowers would not face foreign currency risks, which they normally face if the debt is denominated in one of the foreign currencies.

This issue is also an acknowledgement on the part of ADB that Indian debt market has come of age and also that the country is not short of resources to that extent.

In its press release ADB has stated that "The bond issue underscores ADB's confidence in the Indian capital market." When ADB lends these funds to the Indian borrowers it means that there has not been net inflow of resources form the rest of the world.

All that ADB is doing is to act as a financial intermediary like one of the domestic institutions/banks in raising resources from the domestic market for on-lending to Indian borrowers.

Thus, there is going to be one more financial intermediary to compete with other domestic institutions in similar type of activities. If we use the language of financial economists it amounts to further diversification of the structure of financial institutions.

This should help in deployment new tools of appraisal as ADB is a DFI with an international brand.

The basic question one needs to address is whether the entry of ADB will have any positive impact on the Indian debt market.

There are some obvious reasons why the answer to this question is a small Yes.

Since in relation to the size of the outstanding government debt as of December 2003 of Rs 9,59,903 crores the amount of ADB's borrowing is quite small, ADB's bond issue therefore is not going to create waves "" but only small ripples "" in the Indian debt market.

ADB has indicated that the current issue would help enhance liquidity in the Indian swap market since ADB is planning to actively undertake interest rate swap transactions for asset and liability management purposes.

This is obviously for the purposes of hedging ADB's risks until the borrowed funds are actually dispersed to its borrowers. Indian derivatives market is growing rapidly and through ADB we will have one more intelligent player in the market.

But we need to recognise the fact that ADB will continue to remain a small player in the Indian derivatives market as ADB's outstanding borrowings and therefore its deployable resources in the Indian market during the next several years would continue to remain relatively small.

A path-breaking offering

R V Joshi
Managing Director, STCI

The Asian Development Bank (ADB) bond issue is of significance to the Indian debt market in many ways.

Although there have been bonds issued by ADB in other countries, this one distinguishes itself from others as ADB has, for the first time, raised funds from domestic bond market of a country which also borrows from it.

ADB's entrance as an issuer indicates that country's debt market infrastructure has come of age. Other supranational issuers such as the International Finance Corporation, Washington are also expected to float rupee bonds in India soon.

There are benefits that accrue to India with the opening of its doors to responsible, creditworthy issuers. ADB itself is expected to repeat such a programme again, which is likely to have a positive demonstration effect for other international issuers in due course.

This would only result in enhancing the confidence level of international institutions and other issuers in the efficiency and strength of Indian debt market and perhaps confidence in its currency too.

This ADB-initiated breakthrough is also expected to enable the Indian market to move a step further in encouraging highly rated global MNCs who might be planning to undertake investments in India funded by local borrowing itself.

This would, indeed, have a strong impact on the further development of the Indian debt market in providing high quality debt papers. Both for investors subscribing to and for issuers like ADB, it is a win-win situation.

The issuer is able to source local currency funds at a reasonable market related costs and the investor is also assured of high quality assets.

Such issues which are several notches higher than the sovereign bond rating would also give investors an opportunity to diversify their portfolio risk.

Foreign investors who may be allowed to invest in such bonds would also have the benefit of doing away with or minimizing credit risk though they do have to manage currency risk to some extent. The ADB issue has a maturity of 10 years.

It can spur longer maturity swaps in Indian bond market in course of time. This could be another positive fillip to Indian debt markets as in the initial stages of swap market development in Indian bond market it is still limited to shorter periods though it is gradually changing.

Despite many positives, there could be some reservations in allowing international institutions and MNCs to raise such rupee denominated bonds in India.

One of the concerns could be that such issuances which have highest ratings may result in crowding out of local issuers. However, such concerns appear may not be pertinent now given the huge developmental activities on hand and the enormity of resource requirement to meet those infrastructural and development activities.

Indeed, there is a lack of adequate supply of quality debt papers in Indian market today. Therefore, issuance of quality papers by supranational institutions like ADB and IFC would only add to the strength of Indian debt market.

Finally, the ADB issue will also lead to supply of cost-effective resources to various infrastructure and core projects in India. The present issue is only the beginning and it's a welcome development in all respects.