IFC's Offshore Bond Program for India Successful-VRK100-21Nov2013

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On November 19, 2013, IFC issued the first tranche of USD 160 million or INR 10 billion under its USD 1 billion Global Rupee Bond Program. The issue received very good response from global investors and subscribed two times, the details of which are given in the above template. The investors are from the US, Europe and Asia. They include fund managers, central and private banks. The coupon for the bonds is 7.75 percent, which is 70 basis points or 0.70 percent below the prevailing 3-year Indian government bond yield.

The bond is International Finance Corporation’s first rupee issuance, and the first bond issued under its USD 1 billion offshore rupee bond program. IFC, which focuses exclusively on the private sector, is an arm of the Washington, DC-based World Bank Group. 

The success of this IFC’s offshore rupee bond issue indicates the attractiveness of India for global investors—reflecting investor confidence.

  

What is this Global Rupee Bond Program?

IFC and the Indian government worked closely to bring this offshore bond program. This is the first of its kind Indian rupee-linked offshore bond program initiated by the IFC. This USD 1 billion program was launched by IFC on 9 October 2013. It the largest of its kind in the offshore rupee market—aimed at strengthening India’s capital markets and attracting greater foreign investment. IFC will use the money raised from this rupee-linked bonds to finance private sector investment in the country. It may be noted that the exchange rate risk on the bond is borne by the investor.

This bond program needs to be seen in the context of higher volatility of rupee against the dollar in recent months. The Indian government took this initiative with the IFC, in order to strengthen India’s capital markets and bring back foreign investors.

What is the purpose of this bond program?

IFC will issue bonds whose principal and coupon payments will be linked to the Indian rupee exchange rate. The US dollar proceeds from the bonds will be converted to rupees in the domestic spot exchange market and then lent exclusively to Indian private sector companies. The lending will be done in rupees.

Though the bonds will be denominated in dollars, they will be linked to the dollar-rupee exchange rate.  The bond’s value will move in tandem with rupee bonds, but the settlement will be in dollars for the convenience of global investors.  Once trading starts in these bonds, these bonds would reflect the risk premium attached to India and the rupee’s strengths and weaknesses. 

Benefits of the Bond Program:

1. IFC will use the funds to finance small and medium-size enterprises as well as companies engaged in agriculture and infrastructure development

2. Strengthens India’s capital markets by bringing liquidity, diversity and depth to the offshore rupee market

3. Widens investors’ base and allows foreign investors to invest in rupee bonds

4. May encourage other issuers to offshore markets

5. Provides an alternative funding channel for Indian companies

Is Indian Rupee Going Global?

An important objective of this bond program is not only to bring in dollar inflows but to send a signal to the international markets about India’s economic strengths.  The first tranche was issued for three-year maturity, but in the coming months IFC may issue long term bonds of up to 10 years. It is noteworthy that IFC enjoys AAA rating (the highest) and their bonds carry zero credit risk. Over the years, IFC has issued bonds in 13 local currencies, including the Brazilian real, the Chinese Yuan and the Russian ruble.

China has been making concerted efforts to internationalize its currency Yuan. In the next five to ten years, Yuan may emerge as one of the top traded currencies in the world. India needs to take cues from China in order to take Indian rupee global.

As India is hungry for capital, there is an urgent need to deepen and widen domestic capital markets and bring foreign money to India. The success of the first phase of IFC’s offshore bond program reflects confidence reposed by global investors in India.  On the day he took office, RBI governor Raghuram Rajan said, “As our trade expands, we will push for more settlement in rupees.”

To make internalization of rupee real, India needs to open up its financial markets further and make the country attractive for all kinds of investors internationally.

           

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Notes: USD – US dollar, INR – Indian rupee.

References: www.ifc.org and www.pib.nic.in

Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

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