Indian Railways Finance Corp, the finance arm of Asia's largest rail network, plans to raise up to $1 billion through offshore rupee bonds, making it the first domestic issuer to eye so-called "masala" debt to diversify its source of funds.
The Reserve Bank of India gave Indian companies the green light to raise bonds offshore in rupees earlier this month, a move seen as a small step towards full rupee convertibility, one of the objectives set by the RBI Governor Raghuram Rajan when he took charge in 2013.
Rajan has since said full capital account convertibility, which would allow foreign investors to repatriate money at will, could happen in "a short number of years".
IRFC plans to use the cash to build and renew infrastructure, and is informally talking to bankers to understand the appetite and pricing in the market for rupee offshore bonds.
"We have a board approval to raise $1 billion from offshore market, but we are yet to decide how much to raise via rupee bond after we see the detailed notification from RBI," said Managing Director Rajiv Dutt at IRFC.
IRFC plans to borrow a total of Rs 176.55 billion ($2.81 bln) in 2015/16 from domestic and offshore markets.
"We are trying to diversify our borrower base," Dutt said, adding that cost will be an important factor to decide on the amount sought offshore in rupees.
Foreign investors' appetite for Indian corporate bonds has been strong. They currently hold 77.6 per cent of the $80 billion limit they are allowed in India.
The RBI's move to allow the offshore rupee bonds this month follows the success of a "masala" bond issued last year by the International Finance Corporation.
However, views are mixed on the cost advantage, given a 5 per cent withholding tax and hedging costs.
"Even a top rated Indian company will be BBB-, which is 7 notches below AAA rated company like IFC. So, the cost advantage compared to domestic market will be not great," said a banker. ($1 = 62.8500 Indian rupees)