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Multilateral FIs allowed to invest in 'masala bonds'
Feb 21, 2017

In news:

The Reserve Bank of India (RBI) permitted multilateral and regional financial institutions to invest in rupee-denominated bonds.


In order to provide more choices of investors to Indian entities issuing rupee-denominated bonds abroad, it has been decided to also permit multilateral and regional financial institutions where India is a member country, to invest in these rupee denominated bonds.

What are Masala Bonds

These are also know as offshore rupee denominated bonds.Masala bonds are Indian rupee denominated bonds issued in offshore capital markets. These will be offered and settled in US dollars to raise Indian rupees from international investors for infrastructure development in India. IFC will convert bond proceeds from dollars into rupees and use the rupees to finance private sector investment in India.

  • Masala bonds, like any other off-shore bonds, are intended for those foreign investors who want to take exposure to Indian assets, yet constrained from doing it directly in the Indian market or prefer to do so from their offshore locations. The settlement of the bonds will be in US dollars but since they are pegged to the Indian currency -rupee-, investors will directly take the currency risk or exchange rate risks. Settlement is done in US dollars because of the limited convertibility of rupee
  • IFC will support private investment in the infrastructure sector and sectors that contribute to economic growth and job creation. Hence, future Masala bond issuances may support other kinds of related private sector investments.

Important benefits for the Indian :The offshore bond program will have important benefits for the Indian capital markets, including:

  • Bringing liquidity and depth to the offshore rupee market
  • Crowding in foreign investors to invest in rupee bonds
  • Encouraging other issuers to offshore markets
  • Paving the way for an alternative source of funding for Indian companies
  • Providing alternative hedging mechanisms for foreign investors
  • It was not due to a whim or loyalty to one’s country that led to such a colourful christening for the local currency bonds. Masala bonds, if they take off, can be quite a significant plus for the Indian economy. They are issued to foreign investors and settled in US dollars. Hence the currency risk lies with the investor and not the issuer, unlike external commercial borrowings (ECBs), where Indian companies raise money in foreign currency loans. While ECBs help companies take advantage of the lower interest rates in international markets, the cost of hedging the currency risk can be significant. If unhedged, adverse exchange rate movements can come back to bite the borrower. But in the case of Masala bonds, the cost of borrowing can work out much lower. The RBI in its April policy said that it would issue guidelines for allowing corporates to issue rupee bonds in overseas markets.

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