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Rupee-denominated bonds, a step the Reserve Bank of India (RBI) has announced for Indian companies, are seen to be attractive for foreign investors while extending the carry-trade play to them.
And, to shift the exchange rate risk exposure from Indian borrowers to foreign investors, to the comfort of the Reserve Bank of India (RBI).
In carry-trade, an investor borrows money at a low interest rate, to invest in an asset likely to provide a higher return. It is common in the foreign exchange market. On Tuesday, the central bank allowed companies eligible for external commercial borrowing (ECB) to issue rupee-denominated bonds abroad. Earlier, only a few international financial institutions were permitted to issue rupee bonds in foreign markets.
“For borrowers operating on a fully hedged basis, borrowing in rupees will remove the operation hassles of hedging, marking to market and exchange of cash flows covering periodic gain or loss. More important, a sharp rupee depreciation impact on unhedged foreign currency liabilities will not be asystemic risk on banks,” said J Moses Harding, group chief executive, liability and treasury management, Srei Infrastructure Finance.
In the recent past, RBI has raised concern on several occasions about the unhedged foreign currency exposures of companies. The latter have been going slow on hedges due to stability in the rupee against the dollar.
“In ideal market conditions, there should not be an arbitrage opportunity between the costs of a hedged foreign currency borrowing and an onshore domestic currency borrowing. But, given the imperfections in Indian markets, the cost of the former is likely to exceed the latter. The attractiveness of and rush for foreign currency borrowing, therefore, can be explained only by the inclination of borrowers to remain unhedged. This surely raises systemic concerns,” said RBI executive director G Padmanabhan, earlier this month in Brussels.
Foreign investors have been bullish on Indian papers and this is evident from the fact that in 2014-15, net inflows in debt were $27.3 billion. “The top-rated corporates, like public sector units which are AAA-rated, will find good appetite. Foreign investors are anyway making investments in corporate bonds. The moment the Foreign Institutional Investors (FII) limit in corporate bonds get filled, the limit will be enhanced. As rupee bonds have now also been allowed, RBI might go a little more slowly in enhancing the FII limit in government securities,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
RUPEE-DENOMINATED BONDS
Pros
- Will lead to shift in exchange rate risk exposure from Indian borrowers to foreign investors
- Opens up a window for rupee-denominated instruments
- Bonds issued by only highly rated corporates might see good demand
- These do not make sense for entities who have export revenue and natural hedge
