Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Offshore rupee bond

Ajay
Shah
provides details of the first issuance of an offshore rupee
bond: the bond issued by the Inter American Development Bank is
denominated in Indian rupees but is cash settled in dollars using the
prices in the non deliverable forward market for Indian rupees.

Ajay Shah is absolutely right in saying that India should promote
greater international use of its currency and encourage the Indian
corporate sector to borrow abroad in rupees rather than foreign
currency. The global environment is today extremely congenial for
these measures today and India is in serious danger of missing the bus
altogether because of faulty regulatory policies. In the name of
capital controls, we have created a regulatory regime that
incentivizes Indian companies to accumulate billions of dollars of
foreign currency debt. This must surely be considered one of the most
irresponsible of India’s economic policies.

We need to move forward on this front rapidly. The December 2006
issue of the BIS Quarterly Review contains an excellent case study of
how the Australians made their currency on of the most
internationalized currencies in the world within just four years of
opening up their market. The New Zealand dollar is an even more
internationalized currency. This article
in the Reserve Bank of New Zealand Bulletin two years ago described
how Eurokiwi and Uridashi bonds have helped reduce cost of capital for
New Zealand borrowers while also reducing risks in their banking
system.

It is high time that we learned from these examples and changed our
policies quickly

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