Will tandoori bonds be as tasty as dim sum?

In his new monetary policy statement on Tuesday, Reserve Bank of India governor Raghuram Rajan said Indian companies will soon find it easier to raise loans from international investors by issuing offshore bonds denominated in rupees. The decision comes after Asian Development Bank and International Finance Corporation sold rupee-denominated offshore bonds in the past two years. How will these new bonds be received in overseas markets?

One useful way to seek an answer is to look at in China. It allowed local companies to issue renminbi-denominated offshore bonds in 2007. The market for these dim sum bonds picked up only after 2010 when entities outside China and Hong Kong were allowed to issue them as well.

It’s perhaps possible for India to replicate this success, but the different ground realities in India and China must also be taken into account.

First, China has strict capital controls. Investors looking for yuan exposures are inclined to buy dim sum bonds. In India, global investors can hold rupee assets through foreign portfolio investments.

Second, an overwhelming majority of dim sum bonds are issued by Chinese state-owned firms that have the implicit backing of their government. This can boost investor confidence. Private Indian firms, at whom the RBI move is largely targeted, have no such advantage.

Yet the decision to allow Indian companies to raise money through offshore rupee bonds—call them tandoori bonds—should be seen as the first tentative step towards eventually making the Indian rupee an international currency.