India takes big step to internationalise the rupee

October 9, 2013 5:01 pm

India takes big step to internationalise the rupee

By Robin Harding in Washington and James Crabtree in Mumbai

India is making a big move to internationalise its currency through a deal with the World Bank to launch the first offshore rupee bond programme. The International Finance Corporation, an arm of the development lender, will vastly boost the size of the offshore rupee market by selling $1bn of bonds to international investors. The launch of the programme shows that India is trying to find ways to attract foreign capital after therupee plunged this summer, when the US Federal Reserve seemed ready to slow its asset purchases from $85bn-a-month.

It follows moves by Reserve Bank of India to open a subsidised currency swap facility, allowing banks to tap dollar deposits from wealthy Indians living abroad, which governor Raghuram Rajan said this weak had earned around $6bn so far.

Jin-Yong Cai, chief executive of the IFC, said that the market turmoil had created new dynamics in international finance and a sense of urgency about deepening the rupee capital market.

“Suddenly you have all these dislocations and volatility of the exchange rate,” he said in an interview with the Financial Times. “People realise, boy, this is an important thing.”

Mr Cai said India had approved the deal in record time. “If you don’t have a deep capital market then your exchange rate is subject to a lot of volatility which has an impact on the real economy,” he said.

Higher interest rates in rich countries will make it harder for emerging economies to attract capital. After several years when cash flooded in, countries like India are now struggling to reform in order to attract capital and offset jitters among international investors.

The offshore bond programme will create a way for investors to buy a rupee asset with the World Bank’s triple-A credit rating, with no risk of being unable to convert rupees back to dollars and without registering with the Indian authorities. Offshore bonds could therefore attract more capital to India.

The IFC will sell the bonds in dollars, convert the proceeds to rupees and invest them in India. It will guarantee to make repayment in dollars but the size of the return will reflect rupee interest and exchange rates.

Mr Cai said that the IFC is also working on an onshore rupee bond, with a programme that could amount to the equivalent of $5bn over 10 years, where it would borrow direct from local investors. “We would love to do a domestic bond as well,” he said. Hurdles to that are pricing, with local investors less willing to pay up for IFC’s credit rating, and some bureaucratic obstacles as well.

“We still believe in the fundamentals of India,” said Mr Cai. “[This bond] will give us capital to invest into projects and support liquidity in domestic financial markets.” The IFC expects to issue the first bond under the offshore programme before the end of the year.