Firms can raise up to $750 m via rupee bonds

This will mark the beginning of issuance of “masala” bonds by Indian companies. The minimum maturity on rupee-denominated bonds to be issued in overseas markets should be five years and there is no end-use restrictions, except for a negative list.

In April, RBI proposed relaxation of ECBs to permit Indian corporates that are eligible to raise external commercial borrowings (ECB) to issue rupee bonds in overseas centres with an appropriate regulatory framework.

Overseas funds have nearly exhausted the previous limit of US$30 billion that was meant to shield local markets against capital outflows, and investors including Pacific Investment Management Co have been pressing for greater access to India’s sovereign bonds.

Describing the decision as a “front-loaded policy action”, RBI Governor Raghuram Rajan said he would work with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate this year are removed.

There will be no restriction on the end use of funds except a small negative list, it said. In case of underwriting, holding of Indian banks can not be more than 5 per cent of the issue size after six months of issue and further such holding should be subject to prudential norms.

Overseas investors will be eligible to hedge their exposure in rupee through permitted derivative products with AD Category-I banks in India.

Besides, activities prohibited as per the foreign direct investment (FDI) guidelines have also been barred from investment from the proceeds raised under this route. “This cut has been delivered against the backdrop of a prospective US Fed interest rate hike, recent weakness in emerging market equities and bonds, weakening of emerging market foreign exchange and stable food prices”, said Dhawal Dalal, executive vice-president and head (fixed income) at DSP BlackRock Investment Managers.

Several Indian companies including NTPC, Indian Railway Finance Corporation were looking at raising funds through this route after RBI issued the draft.

“The limits will be increased from the existing 3.8 percent to 5 percent of the outstanding stock of government securities by March 2018, implying an increase by about Rs.120,000 crore from the existing limit of Rs.153,500 crore”, Economic Affairs Secretary Shaktikanta Das said.