Rupee Denominated Bonds: A Major Shift With Potential

Quite without warning, the Reserve Bank of India (RBI) notified the framework for issuance of rupee denominated bonds under the overall external commercial borrowing (ECB) framework on 29 September. Unlike other surprises from the RBI, this was a pleasant one, particularly because the framework's provisions were more liberal than its draft form, which had left much to be desired.

The issuance of the framework follows the submission of a report to the Ministry of Finance by the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets, in February this year. The report included a recommendation that the market for local currency denominated bonds should be encouraged as it provides an alternative source of debt financing for private and public sector borrowers which does not expose them to currency fluctuation risk. By reducing currency mismatches and lengthening the duration of debt, such bonds could also augment financial stability. To