Home / Economy / RBI suggests govt ask Brics Bank to sell rupee bonds overseas

NEW DELHI/MUMBAI : The Reserve Bank of India has recommended that the government approach the Brics Bank, now known as the New Development Bank (NDB), to sell rupee-denominated bonds in overseas markets.

Selling rupee bonds, a senior official aware of the central bank’s recommendation said, will help India tap foreign savings amid the government’s record borrowing programme and rising yields in the domestic markets.

Borrowing spree
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Borrowing spree

Record borrowings by the Centre and states this fiscal, the government fears, will crowd out the private sector and make fundraising costly for companies. This may, in turn, slow India’s economic growth.

Approaching the markets through the multilateral institution will also help India raise funds at a cheaper rate as the bank is AAA-rated, indicating the highest safety for investments. India’s sovereign rating is just a notch above junk status in comparison. However, with rupee bonds, investors will have to bear the exchange risk and demand higher interest rates to mitigate it. In addition, the cost of hedging currency risk has also risen since the rupee plunged to record lows against the dollar this year.

“Rupee bonds mean that foreign savings can be tapped without any exposure to the foreign currency risk at a time the rupee is depreciating against a strong dollar," a second official said on condition of anonymity. At the same time, given India’s fiscal deficit is quite large, the resource made available by any rupee bonds raised by NDB can at best be a drop in the ocean, this official added. But a banker close to NDB said on condition of anonymity that the institution could not proceed with selling rupee bonds a few years ago as the currency was also going “through a prolonged period of weakness, from 66-65 to a dollar to 72-73 to a dollar, which made hedging the rupee difficult".

NDB had sold renminbi-denominated bonds following the decision to raise bonds in local currencies. The Chinese currency bonds could be converted into dollars. The same, the banker said, would not be possible for the rupee. He, however, added that the reason NDB could be looking at rupee bonds is that while it wants to hit the market with dollar bonds, investors could be nervous about the sale, given a founding member of the bank, Russia, is under sanctions. “That could be the reason why they are saying let’s look at local currency bonds," he added.

The first official said the rupee float might also be useful from the perspective of mitigating the risk of Western sanctions against NDB as Russia is a shareholder and founding member. A government official in charge of tracking sanctions said there’s no precedent of multilateral institutions getting sanctioned, and it is unlikely NDB will face such action. According to NDB’s website, the bank has made it clear that it has put on hold new transactions with Russia. So far, the multilateral institution has raised $1.3 billion by issuing ruble-denominated bonds.

An official close to the government said that rupee bonds would serve well in the face of the pull-out of investments by foreign portfolio investors (FPIs). “En masse withdrawal of portfolio investors is going to hurt if we don’t get external windows for investments. This will help us in raising external resources. The budget speech has identified these windows," this official said on condition of anonymity.

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