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