IFC launches $1 billion offshore bond for India

The bond will be linked to the rupee and the proceeds will be used to finance private sector investment in India

Anup Roy

First Published: Thu, Oct 10 2013. 09 25 AM IST

On 30 June, India accounted for $4.5 billion of IFC’s investment portfolio, more than any other country. Photo: Pradeep Gaur/Mint

Also Read

• World Bank seeks to halve extreme poverty by 2020
• India to purchase $4.3 billion of World Bank bonds: Arvind Mayaram
• IFC invests $2.3 million in education finance firm Avanse
• Prioritizing public health
• World Bank chief says hopes to continue Egypt programmes

Updated: Thu, Oct 10 2013. 08 19 PM IST

Mumbai: In a move that could help internationalize the rupee in the long run, the International Finance Corporation (IFC), an arm of the World Bank group that focuses on the private sector, said on Thursday that it had launched a $1 billion offshore bond programme to strengthen India’s capital markets and attract greater foreign investment.

The bonds will be linked to the local currency and the proceeds will be used “to finance private sector investment in the country,” IFC said in a statement.

“IFC’s offshore bond programme will help bring depth and diversity to the offshore rupee market and pave the way for an alternative source of funding for Indian companies,” Jin-Yong Cai, IFC’s chief executive officer, said in the statement.

In an emailed response to queries from Mint, IFC’s communications officer Alexandra Klopfer said the bonds will be offered in dollars and settled in dollars.

“The initial subscription, repayment of principal and coupon will be in dollars but tied to the dollar rupee exchange rate. So for the investor the bond offers the convenience of a dollar denominated bond but the proceeds are linked to the dollar rupee exchange rate,” Klopfer said.

IFC will convert bond proceeds from dollars into rupees on the domestic spot exchange market and use the rupees for investment in India. The bonds will likely be listed on the Luxembourg exchange, consistent with IFC’s past bond issuances. The bonds will be cleared via Euroclear, the world’s largest settlement system for securities transactions.

IFC’s initiative will help internationalize the Indian currency, according to Harihar Krishnamurthy, head of treasury at FirstRand Bank India. “IFC launching this bond will add credibility to India,” said Krishnamurthy. “Overseas investors who want to take a bet on local bonds, but do not do so fearing uncertainties, can now buy these bonds. Ultimately, this will help boost India’s image as an investment destination.”

According to economic affairs secretary Arvind Mayaram, the bond issuance will be a new initiative for the intermediation of international savings for development in India, a statement by the finance ministry said on Thursday.

It will also help deepen the capital markets in India and establish a rupee benchmark in the global markets, Mayaram said.

On 30 June, India accounted for $4.5 billion of IFC’s investment portfolio, more than any other country. In the year ended March, IFC invested $1.38 billion in India to “achieve several strategic priorities such as promoting inclusive growth in India’s low-income states, addressing climate change, and supporting global economic integration”, it said in the statement.

Globally, IFC has provided over $10 billion in local-currency financing across 58 currencies using a variety of financing tools—more than any other international finance institution.

Interest rates in India are higher than in all major economies from where investors invest globally. The yields on the 10-year bond closed at 8.42% on Thursday. In contrast, the 10-year treasury yield in the US is 2.71%.

The rupee, which touched a historic low of 68.85 per dollar in August, has strengthened about 11% to 61.36 a dollar. Currency dealers expect the local currency to strengthen beyond the 60 per dollar level by the end of this fiscal and to strengthen more if the government manages to achieve its deficit targets.

India’s finance minister P. Chidambaram has pledged to keep the current account deficit below $70 billion, which analysts expect is achievable, given that the trade deficit for September hit a 30-month low of $6.76 billion compared with $17.15 billion a year ago. Chidambaram has also vowed to keep the fiscal deficit contained within 4.8% of gross domestic product.

PINTU KUMAR OJHA

PGDM 3RD SEM