The Reserve Bank of India on Thursday said that it will allow financial institutions to buy back debt papers issued by them abroad as well as those issued by other Indian corporates if they so requested. ICICI has received RBI permission to buy back up to 20 per cent of its bonds listed abroad.

"If there is a good spread available then we will buy our papers. But the buying will only be marginal. The permission to buy back bonds is essentially an enabling provision," said a senior ICICI executive, Natchiket Mor. He said the provision will be utilised as an investment option for its foreign exchange funds which are currently invested in US Treasury bills.

"At present, we invest most of our surplusforex funds in US treasuries, which give a lower return. Shouldn't we be allowed to invest in our own paper if it gives us a higher yield? The spread on our paper has increased because of a variety of reasons which have nothing to do with ICICI per se.

The investment in our paper will also help in reducing the spread," says Mor, who heads the ICICI treasury.

ICICI will not be buying back its foreign bonds in order to liquidate it, he said.

According to industry sources, no financial institution would like to replace cheap funds -- raised through the overseas bond issues -- with the relatively costlier rupee funds. They feel that even if one accounts for the large spread available on these papers in the secondary market abroad, the difference between the issue price and the market price will not compensate for the higher interest rate that an institution will have to shell out to raise funds domestically.

The Industrial Development Bank of India (IDBI) and Industrial Finance Corporation of India(IFCI) are also likely to follow the ICICI move. The RBI announcement is meant to build up sentiment towards reducing the spreads on Indian paper after the south-east Asian crisis and the sanctions following the nuclear blasts, said industry observers.

The large spreads, which in many cases amount to around 400 basis points above Libor, also restrict the ability of Indian corporates to raise resources abroad as the secondary market quotes is taken as a benchmark for fixing interest rates on plain vanilla forex loans.

The Reserve Bank has also allowed financial institutions to buy back Indian papers floated by other Indian corporates on their behalf. According to Mor, ICICI is yet to receive such requests from any Indian corporate which has its bonds listed abroad.