Japan ready to back bond issue by India

Written by Sunny Verma | Sanjeeb Mukherjee | Mumbai, New Delhi | Updated: Jun 26 2009, 07:41am hrs
Global Market
Japan is willing to guarantee India a sovereign bond issue of up to 250 billion yen in the Tokyo market. We have held discussions this week about the possibility of guaranteeing such a bond issue with senior officials from the Indian ministry of finance, Hiroshi Watanabe, president & CEO, Japan Bank for International Corporation (JBIC), said on Thursday.

Watanbe was talking on the sidelines of the fourth global meeting of the Emerging Markets Forum, organised by IDFC and supported by FE and the Bombay Chamber of Commerce. India already has a $3-billion currency swap agreement with Japan. However, this has not been utilised so far.

The Japanese offer is part of the 500-billion yen (about $5.24 billion or Rs 25,200 crore) funding programme it has promised the Asian economies to tide over the current financial crisis. Watanabe said Indonesia and the Philippines have agreed to issue sovereign papers worth 250 billion yen in the Tokyo market. India, too, can issue bonds in Japan through RBI or other government-owned vehicles like SBI or the India Infrastructure Finance Company Ltd.

In the case of India, there could be some kind of deviation, as the central bank or any other government agency might also issue the papers. In case it is a government agency, we will need some kind of guarantee from the government. So, all these need to be discussed, Watanabe said.

In the early 1990s, SBI along with other banks had made two overseas bond issues when the country faced a forex crisis.

We first discussed this issue with Mr Chawla (finance secretary Ashok Chawla) in May, so we are again discussing that, Watanabe said, adding, I hope to have two more countries, so the entire amount (the remaining 250 Japanese yen) may not go to India.

Watanabe said the volatility in the Japanese currency could make the bond issue a bit risky. The Japanese market is ready for shorter maturity papers carrying a coupon rate of more than 1.5%. Yes, it is of 2-3 (years) maturity. Since the market is still not very confident, the countries dont want to issue bonds of say 7-8 years maturity, he said. He said JBIC fully guarantees the payment of principle but the interest component is covered only partially.

JGB (Japanese government bond) for 10 years has a coupon of around 1.5%. Of course, some premium will be added on to the issues by the Asian countries. This is where we provide the guarantee, but we dont provide 100% guarantee. If we provide 100% guarantee, then the rate would be very similar to the JGB which is 1.5%, which is not very attractive for the Japanese investors. So, may be, a partial guarantee would create some difference, Watanabe said. He said there is a general consensus that the Japanese currency will not appreciate sharply. The performance of these bonds is very closely linked to the movement of yen. If the yen appreciates to as much as, say, 50 yen to a dollar then such bonds are rather risky. (Currently, it is at 95.3 yen to a dollar). But, I think that now everybody, including the Indian government, believes the yen should not go up to 50 or 60 to a dollar. Of course, there will be some volatility, he said.

By RBIs reference rate on Thursday, 100 Japanese yen could be exchanged for Rs 50.40.