India’s offshore rupee bond market has made a big comeback this year, with deals from issuers such as the World Bank and the Asian Development Bank pushing annual volumes to an all-time high.
Investors have this year bought more than 420 billion rupees ($5 billion) of offshore rupee bonds, which are rupee denominated but settled in dollars. That is almost double last year’s tally and has already beaten the full-year record set in 2017, according to data compiled by Bloomberg.
The market is benefiting from a broader rise in demand for Indian assets, which is being fueled by bets that the currency will be resilient to dollar shocks and insulated from volatility that knocks other emerging-market currencies.
“The rupee is blissfully uncorrelated to other EM currencies while at the same time presenting a high beta to the dollar,” said Carl Vermassen, a portfolio manager at Vontobel Asset Management AG. “This makes it a unique EM asset.”
The rupee fell in the wake of the US election but held up better than most other Asian currencies, which were hit by a dollar rally. There are signs the central bank stepped in to support the currency, said a trader in the country.
Multilateral lenders including the World Bank, the European Bank for Reconstruction & Development and the Asian Development Bank have issued offshore rupee bonds this year, helping them fund projects in a country that is increasingly in the spotlight. Multilateral lending to India hit $78.15 billion in June, its highest on record, according to Bloomberg-compiled data.
But the market is attractive enough for SSAs that some issuers have used offshore rupee bonds for more general funding this year, keeping the dollar proceeds and using swaps to offset exposure to movements in the rupee, said Jonathan P. Grosvenor, assistant treasurer at Asian Development Bank.
“This doesn’t mean the proceeds are not used for development finance, but it does mean that they are not always used for local currency development finance in India,” he said, adding that the ADB does use its offshore rupee bonds to fund local operations.
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The surge of demand has been helped by moves from JPMorgan Chase & Co. and FTSE Russell to include Indian bonds in their emerging market indexes, throwing open the gates to a larger pool of global funds. Rupee-denominated bonds from supranationals are highly correlated with Indian government paper, said Yifei Ding, who helps manage Invesco Ltd.’s India Bond Fund, which has about $259 million of assets.
Investors have also been encouraged by a lack of withholding tax on offshore rupee bonds, an advantage over buying notes in India’s local government debt market. Interest income is taxed at 20%, although tax treaties can reduce this rate.
There are risks on the horizon for investors jumping into Indian bonds, including signs of a slowing economy and uncertainty about the timing of rate cuts. And issuance remains well below what bankers and issuers had once hoped for: In late 2015, Barclays Plc predicted the offshore rupee market would grow to $50 billion in three years. remains. But some investors think the market’s recent boom will last.
“The issuance will continue to pick up in the coming years, and with that more and more banks will get involved in making markets for these supras offshore,” said Invesco’s Ding. The bonds are a “very good supplementary part of portfolio construction,” he added.
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