Mumbai/Singapore: The opening of a ‘Masala’ bond market, where Indian firms issue bonds offshore in rupee, will provide an opportunity for some larger issuers to diversify funding sources without taking on currency risks, says Fitch Ratings.
The ability to diversify funding, according to Fitch, would be credit positive, but in the early stages of development the market will likely be restricted to better-quality issuers or ones with some degree of name recognition in the local markets.
The Reserve Bank of India (RBI) announced relaxed rules in late September to allow Indian companies to issue local currency-denominated bonds overseas. This follows a 2014 decision to allow the Asian Development Bank and International Financial Corporation to issue rupee-denominated bonds in the international market.
The new guidelines allow for a wide range of potential borrowers, including non-bank financial institutions, and other corporates which were not permitted to issue offshore under the earlier external commercial borrowing (ECB) framework. Masala bonds will be required to have a minimum maturity of five years, and there is a USD750m per year limit for borrowers – though a firm can exceed this limit with RBI approval.
There have been no Masala bond issues by Indian firms yet. But Fitch believes that issuers will be likely to have to pay more than if they issued in the domestic market. As Masala bonds are denominated in rupees, foreign investors will be taking currency risk. Furthermore, issuers will most likely have to pay a premium for the limited offshore liquidity in rupee.
As such, the main incentive for Indian companies to issue Masala bonds is likely to be for the diversification of funding sources, as opposed to price. Non-bank financial institutions, which currently rely heavily on domestic banks for funding, could particularly benefit from the new market.
That said, the scope for development of the Masala bond market is likely to be limited in the near term. Fitch believes that in the early stages only better-quality firms at investment grade – state-owned enterprises and large non-bank financial institutions – will be in a position to successfully issue. Smaller, sub-investment-grade issuers may not find the Masala bond market practical.. Notably, foreign-investor interest has yet to be tested, and will be affected by sentiment regarding the rupee/US dollar exchange rate and other macro factors.
Overall, the development of a Masala bond market would be positive for Indian firms, opening up potentially significant new sources of funding. However, the development of the market beyond a select group of large, higher-quality issuers could take time and will be dependent on international liquidity, domestic macroeconomic variables and foreign-investor sentiment.