IFC bond points to offshore rupee push
* World Bank unit to sell rupee bonds to global investors
* Move paves way for liberalisation of Indian currency
* Power Finance and others courting foreign bond buyers
By Manju Dalal
SINGAPORE, Oct 11 (IFR) - The World Bank's private-sector arm is to offer up to US$1bn of global rupee-linked bonds in a move that will boost the Indian currency's profile in the international capital markets.
The International Finance Corp's bond programme, the most significant development to date in the offshore rupee market, comes as India is stepping up measures to attract foreign investors and restore confidence in its embattled currency.
It also points to a liberalisation of the closely controlled rupee, in line with comments from the country's newly installed central bank governor.
"In these times of uncertainty for the Indian economy, IFC has been given the support and approval by the Indian Government to launch the Indian offshore rupee programme," said IFC treasurer Jingdong Hua.
"The government and the RBI governor are liberalising the financial sector by promoting access, and that is the key driver for the Indian economy to make a difference."
IFC has yet to appoint arrangers, but will issue its first tranche of offshore rupee-linked bonds in the coming weeks, according to Monish Mahurkar, director of treasury client solutions at IFC.
The new bonds will settle in US dollars, but principal and coupon payments will vary according to the rupee exchange rate. As with standard Eurobonds, they will be accessible via Euroclear, removing the need for buyers to navigate India's complicated quota and registration system, while IFC's Triple A rating will allow investors to avoid any Indian credit risk.
"The IFC deal... is an option, where people can play the currency with a very safe underlying credit," said a debt capital markets banker who specialises in advising governments.
"With it, you can tell who is buying them and then gauge pricing. From there, you can prepare the way for India."
STAMP OF CONFIDENCE
A global rupee-linked bond from IFC will further lift India's profile among international investors, giving a much-needed funding boost to a country that aims to mobilise US$1trn in infrastructure investment in the five years to 2017. It will also support the country's balance sheet, as IFC plans to repatriate all the proceeds from the offshore programme to India to fund its private-sector investments.
As of June 30 2013, India accounted for US$4.5bn of IFC's committed investment portfolio - more than any other country. IFC invested US$1.38bn in India in the year ending in June.
"IFC remains very bullish about the long-term economic prospects of India and this bond programme puts a stamp of confidence on India," said Hua.
A global rupee-linked bond from IFC will also promote interest in India's capital markets at a time when officials are looking to lower many longstanding barriers to entry.
The newly installed governor of the Reserve Bank of India, Raghuram Rajan, called for the internationalisation of the rupee in his inaugural speech in September.
"This might be a strange time to talk about rupee internationalisation, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees," Rajan said.
"This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue the path of steady liberalisation."
India also aimed to win inclusion in several global bond indices, Reuters reported on Thursday, a move that would require the removal of barriers preventing foreign investors from accessing the local government bond market.
JUST THE BEGINNING
Currently, only investors that have registered with India's local securities regulator can bid for a quota to invest in government bonds.
The creation of an offshore market for rupee-denominated debt, however, may be one way for the government to increase the pool of potential buyers without relinquishing control over the local market.
Mexico, for example, began issuing peso bonds via Euroclear in 2010, syndicating the debt through foreign banks. Once an offshore benchmark issue was created, the sovereign would reopen it through auctions until the size and liquidity guaranteed inclusion into several indices.
India may find a similar course of action attractive.
"It would make sense for India to turn to offshore domestic currency bonds," the banker said.
Government officials, including RBI governor Rajan, have repeatedly ruled out an overseas sovereign bond issue, be it in dollars or rupees, but other Indian issuers may be more keen on the Euroclear route.
Several public sector companies, including Indian Railway Finance Corp and Power Finance Corp, have visited international investors over the past few months to build support for their bonds in the local market. Private sector developer L&T Infra and IDFC have also done similar roadshows in the recent past.
The IFC's mandate includes the development of local capital markets across the world, and the multilateral remains determined to play a role onshore in India.
"For a country to achieve its full economic potential, it really needs to have an open, liquid and deep capital market on all fronts," said Hua.
"This is just the beginning... Our plan is really to work with the Indian Government for IFC to become a significant player in the onshore rupee bond market."
In March, IFC pledged to issue US$4.3bn of rupee bonds in India's onshore market over the next three years to boost its local lending capacity.