A very interesting observation from the newspapers is that the rupee is spreading its wings far and wide like the bollywood like the Indian business footprint across the globe, its everywhere.
And yesterdays article in the newspaper Times of India is any indication its having a field day everywhere.
NEW DELHI: Sabse bada rupaiya. The Reserve Bank of India is going to find it increasingly tough to prevent the rupee from appreciating, if the growing appetite for the rupee in different parts of the world is anything to go by.
For instance, the US-based Inter-American Development Bank (IADB) raised rupee-denominated debt worth Rs 150 crore money in the Japanese market in May. The issue was of 10-year bonds offering an interest rate of 8.25%, with payments to be settled in dollars. It had raised a smaller amount for three years in February at 7.25%.
The transaction is only a pointer to the growing strength of the rupee, which is fast gaining the confidence of investors across markets. The IADB floated a rupee-denominated dollar settlement issue after Japanese investors insisted on holding rupee assets, said an official.
The dollar value at redemption would depend directly on the valuation of the rupee. This debt issue is significant because it was floated in a mature market, signalling that even investors in developed economies are now betting on the rupee.
Says Vineet Gupta, head-local credit analysis, Calyon Bank, “Every investor wants India in his portfolio and the global demand for rupee-denominated assets will continue to strengthen. This comes on the back of high growth in the economy and the appreciating rupee.”
The rupee has appreciated by a whopping 8.78% since January this year, from 44.2 per dollar on January 1 to 40.63 per dollar on Thursday. Rupee-denominated debt instruments floated outside India cannot be settled in rupees since the Indian currency is not fully convertible.
The underlying valuation of the transaction is driven by the rupee even though the settlement is in dollars. This implies that at the time of settlement of the loan, the borrower will pay back the dollar equivalent of the rupee. Since the expectation is that the rupee would appreciate against the dollar, the lender expects to get back more dollars per rupee lent.
For instance, if at the time of the debt issue, the rupee is trading at Rs 41 per dollar and the issue size is $100 million (Rs 410 crore) and at the time of repayment, the rupee is trading at Rs 40 per dollar, then the final valuation of the settlement will vary according to the rupee and the borrower will have to pay back $102.5 million (4100/40).
Thus, an investor would opt for a rupee-denominated paper to gain from a higher dollar return at the time of repayment, owing to the appreciation of the rupee. This appreciation has led to increased demand in global markets for rupee-denominated assets.
Industry sources said a couple of months ago, there was a similar issue of rupee-denominated bonds, with settlement in dollars in London to finance a takeover deal of a company. In fact, Dubai launched rupee-dollar futures contracts that will be traded on the Dubai Gold and Commodities Exchange (DGCX) on Thursday.
The DGCX Indian rupee contract will enable individuals and companies to hedge and trade their rupee risk. So far, the major market available to hedge rupee risk is the non-deliverable forward market, where a futures contract can be denominated in rupees, but settlement takes place in another currency.
While the Chinese Renminbi is a potential candidate for an emerging market currency with strong potential for appreciation, such deals are not yet happening on any large scale in that currency because of the perception that the government, rather than the market, determines the exchange rate in China.