Reserve Bank of India (RBI) reiterated that the quantum of masala bonds raised by companies would need to be within the overall limit set for foreign investment in corporate bonds — currently R2,44,323 crore. Of this quota, an amount of R1,66,120 crore has been used up till November 2, according to data available on National Securities Depository Limited (NSDL). The central bank issued the final guidelines for banks with regard to masala bonds on Thursday.
So far, there have been nine issues of masala bonds by Indian entities, of which Housing Development Finance Corporation (HDFC) has raised funds in four tranches. The other issuers are Indiabulls Housing Finance, NTPC, Adani Transmission, ECL Finance and Fullerton India, having raised a combined total of close to R9,800 crore. The rate at which these companies have raised money ranges between 7.48% and 9.10% across tenures of three to five years. So far no bank has issued masala bonds as they have been awaiting the final guidelines.
Currently, State Bank of India offers 7% on fixed deposits with a maturity of two-years to less than three years and a rate of 6.5% on fixed deposits of a maturity of three years to less than five years. The interest rate on certificates of deposits for a tenure of one year is between 6.5% and 7%.
As in the draft guidelines, the RBI said banks will now be allowed to raise both Tier-I and Tier-II capital through issues of rupee-denominated overseas bonds. It also permitted lenders to issue long-term masala bonds for the purpose of financing infrastructure projects and affordable housing.
Masala bonds are rupee-denominated bonds issued in overseas markets with the investor taking on the currency risk. The decision comes a couple of months after the RBI had announced that it would allow banks to raise funds through masala bonds. The decision to do so was in line with the central bank’s broader vision of deepening the corporate bond market, articulated during former RBI governor Raghuram Rajan’s final months in office. “These measures are intended to further deepen market development, enhance participation, facilitate greater market liquidity and improve communication,” the RBI had said in its statement in August.
They are a lucrative source of funds since the currency risk is borne by the investor and not the issuer. As on October 17, approximately 93% of the quota for gilts had been utilised, according to data available on NSDL website. Foreign portfolio investors (FPI) have sold a net $1.1 billion of debt instruments — both corporate bonds and gilts — in October.