rupee has faced a lot of volatilityover the past few months. But some believe the worst is over.
Demand at government bond auctions is up after months of failed auctions, the Wall Street Journal reported.
The rupee has gained nearly 9.2% since lows in the beginning of September. But it is still over 16% lower than last year.
In an effort to drum up enthusiasm among foreign investors, the government has partnered with the World Bank’s International Finance Corporation (IFC) to launch its first offshore rupee bond program. The partnership with the IFC aims at allaying foreign investors’ fears over India’s slowing growth and policy paralysis.
As part of this effort, the bonds will be sold in dollars, and then converted back to rupees which would be invested in India’s private sector, according to the FT. Investors would be repaid in dollars, but returns would depend on fluctuations in the rupee’s interest rates and exchange rates.
“By co-working with the World Bank you get some of the credit risks involved with India off the table,” Vishnu Varathan, an economist at Mizuho, told the BBC.
The proposal was quickly accepted by India’s gridlocked political machinery. The chief executive of the IFC, Jin Yong Cai, told the FT, “Suddenly you have all these dislocations and volatility of the exchange rate… People realise, boy, this is an important thing.”
The first offshore rupee bond auction is expected to take place before the end of 2013.