The Reserve Bank of India on October 27 moved in to liberalise the bond market, permitting companies to sell rupee-denominated bonds in overseas markets. This will 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.

Overseas investors are allowed to invest $51 billion in Indian corporate bonds issues, and FIIs have already used 78% of this 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.

Why it is introduced??

The initiative is a great step towards broadening the corporate bond market and reducing the dependence on domestic capital markets and banking system. 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 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. 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.

Housing Development Finance Corporation (HDFC) has become the first Indian company to receive an in-principle board approval to raise rupee-denominated bonds abroad, also called masala bonds. On October 26, the company’s board approved raising up to $750 million through this route.

Try it…

Which bank accredited by the Green Climate Fund as an implementing entity for climate change-related projects in India?