Mumbai: In the first-ever deal of its kind, Inter American Development Bank, a New York-based multilateral development bank, has issued a billion-rupee bond to be listed at Luxembourg.
Analysts say the active investor response to this bond by European and US institutional investors shows there is a strong appetite for Indian-rupee bonds that can’t be fully met because of regulatory restrictions. The Indian central bank allows foreign investors to buy only $1.5 billion (Rs6,600 crore) of domestic rupee bonds. Investors who have been blocked out can now buy such an offshore bond that gives them exposure to the local bond market, while staying outside the reach of Indian regulators.
Investors who want exposure to rupee bonds can’t do so without registering as foreign institutional investors (FIIs) and are thus driven to overseas options. This bond meets that demand. In this non-deliverable bond, investors take a notional exposure in the rupee market while buying in dollars, and no actual rupee transaction is involved. A non- deliverable swap (NDS) is usually done between a currency that is fully convertible (“major currency”) and one that is not fully convertible (“restricted currency”) and thus settled on a non-deliverable basis.
“NDS provides an offshore mechanism to hedge currency exposures that were previously considered ‘un-hedgeable’ either due to the absence of local funding or limited access to foreign exchange markets,” says a domestic bond dealer.
Speaking to Mint, Laura Fan, principal funding officer of Inter American Development Bank, said, “Asset management companies of Belgium, Germany, Switzerland and Canada have invested in this paper because they are bullish on the India story. They are keen to take exposure in the bond market, without carrying a credit risk.”
This AAA-rated three-year paper bears a coupon rate of 7.25% that is less than the current rate of 7.85% on the three-year Indian government bond, and reconfirms that the appetite for such bonds is strong. Offshore investors have been bullish on Indian bonds owing to India’s recent upgrade to an investment grade by global rating agency Standard & Poor’s. Another global rating agency, Moody’s Investor Services, upgraded India to investment grade a few years back.
Many European and American investors found it difficult to enter the Indian bond market because of stringent local regulations stipulated by the Indian banking regulator, said Fan. “So we structured an AAA-rated product tailor-made to suit their needs. We think, that the potential for such products is great, and are open to doing more such issuances in the future,” she said.