RBI mulls letting firms raise rupee debt offshore

"These issues have been received with interest. The appetite for rupee debt amongst international investors is a welcome development," the RBI said in a statement following a policy review.

The RBI said it was in talks with the government to make it easier for international financial institutions like ADB and IFC, a World Bank financing arm, to raise more funds for Indian infrastructure projects via offshore rupee-denominated bond sales.

The central bank said it was also looking at permitting companies that were already eligible to raise money abroad to directly issue rupee bonds overseas.

Letting corporates to issue rupee debt offshore could help contain India's foreign currency denominated external debt obligations, while also reducing systemic risks stemming from companies' large unhedged foreign exchange exposure, analysts said.

They said offshore rupee debt was likely to attract good demand, particularly due to the improved investor sentiment towards India and the country's relatively higher yields.

"Demand of such rupee-denominated papers was tested by IFC and ADB last year, which was well-received by investors. This move will be timely given the economy's macro stability and improved fundamentals," said Radhika Rao, economist with DBS in Singapore.

The RBI has for months sought to encourage companies to do more to hedge their foreign exchange exposure.

Foreign institutions have been looking to buy high-yielding Indian debt in recent quarters, as they reached the limits of their onshore investment allocation for government bonds.

In November, IFC sold Rs 10 billion ($160.46 million) worth of offshore 10-year Indian currency bonds at nearly 2 percentage points below the benchmark 10-year government bond.

And in August, ADB raised Rs 300 crore (Rs 3 billion) from an offshore rupee-linked bond issue, to be settled in dollars.

Analysts, however, warned demand for such bonds - especially those floated by corporates - would depend on hedging options.

"Demand for these bonds will be good only when you are giving investors the confidence of insulation, especially considering the high volatility we have seen in the rupee in the past," said Shakti Satapathy, a fixed income strategist with AK Capital in Mumbai.

"Unless investors have clarity with regards to the safety of their investment, appetite would not be much in the longer-run." ($1 = Rs 62.3200)