The success of two masala bond issues in recent days—first by Housing Development Finance Corp. Ltd and then by NTPC Ltd—is an important step towards the Indian rupee’s gradual internationalization. These are bonds denominated in rupees rather than a foreign currency such as the dollar, ensuring that the exchange rate risk from overseas borrowing is borne by investors rather than issuers. Raghuram Rajan had said in his first speech after taking over as Reserve Bank of India governor almost three years ago that he would try to push the internationalization of the rupee.
The next stage will be tracking how these bonds are priced during secondary market trading, because these prices will give us a sense of how foreign investors expect the Indian currency to move. In that sense, the exchange rate will be affected by the views of international bond holders, at a time when the offshore non-deliverables forwards market is already an important factor in the way the rupee is priced.