World Bank plans $500 mn bonds in Re denomination

World Bank plans $500 mn bonds in Re denomination

The World Bank plans to issue rupee-denominated bonds worth about $500 million (Rs1,970 crore) overseas to help global investors diversify their holdings by adding rupee-denominated securities to their portfolios.

It recently sought and received the Indian government’s approval to issue rupee-denominated bonds overseas, said a senior finance ministry official, who did not want to be identified. The World Bank did not respond to an email questionnaire sent to it on Monday.

“There is now a large demand for long-term INR (rupee) bonds on the part of global fixed-income investors. One reason is portfolio diversification. No large global investor can afford to have less than 1% of total fixed-income investment in bonds issued by a country which has over 2% of world gross domestic product (GDP) and is one of the fastest growing economies...," said a report, released this year, of a committee headed by Percy Mistry, which looked at ways to transform Mumbai into an international financial centre.

The Bank’s bond issue is part of a trend—the internationalization of the rupee.

Earlier this year, Inter-American Development Bank (IADB), a multilateral development institution for Latin American and Caribbean countries, made two issues of rupee-denominated bonds overseas to raise $400 million in all, said the finance ministry official. The issues were successful on account of an eagerness among global investors to buy rupee-denominated assets, he added.

“The issues are largely driven by investor demand," said A.V. Rajwade, a forex consultant in Mumbai. “The rupee as an invoicing currency is not getting acceptance, but the rupee as an investment currency is getting acceptance," he added, referring to the fact that exporters and importers still do not prefer to bill in rupees (India’s software firms, for instance, bill in dollars).

The demand from investors was strong enough for IADB to price the rupee-denominated bonds at an interest rate that was about a percentage point lower than yields on comparable government securities traded in India, said Rajwade.

That means investors saw enough merit in holding these bonds despite the relatively low interest rate (or coupon rate) on them.

Offshore rupee bonds such as the ones issued by IADB are an extension of the non deliverable forward (NDF) markets in the rupee. NDFs started off as forwards contracts, done over the telephone, where investors take a call on the future exchange value of the rupee against the dollar. The NDF rupee market developed on account of tight restrictions in India’s forward market for forex contracts.

Similar restrictions in the domestic bond market have led to the rupee-denominated bonds being sold overseas. Though the bonds are denominated in rupees, they are settled in currencies such as the US dollar. Consequently, IADB did not have to approach the Indian government for permission to issue rupee-denominated bonds, but the World Bank did so as India is a member, said the finance ministry official.

The Bank website identifies diversification of investments as an important reason for offering bonds denominated in “non-core currencies" such as the Malaysian ringgit to investors. The interest rate on the bonds denominated in non-core currencies are linked to the prevailing interest rates of that country.

World Bank bonds denominated in non-core currencies are listed in Luxembourg and settled according to the systems of clearing organizations such as Euroclear. Some of the Bank’s recent non core currency bonds offerings are in the Colombian peso, the New Turkish lira, the South African rand and the Polish zloty.

(This is the concluding part in a series on the internationalization of the rupee.)