The spurt in issuances of masala bonds is likely to be positive for Indian companies, especially for those that don’t have a natural hedge against foreign currency risks involved in external commercial borrowings, rating agency ICRA has said. The rupee denominated bonds or masala bonds accounted for 39 per cent of the total ECBs of $7.39 billion reported by Reserve Bank during the fourth quarter of fiscal 2016-17.
“With their cash-flows denominated in Indian rupees, many of the borrowers of ECBs don’t have a natural hedge against foreign currency risks inherent in that instrument. “The trend of increasing masala bonds issuance is hence positive for such borrowers, not only from the risk aspect but also from the pricing perspective,” ICRA’s group head (financial sector ratings), Karthik Srinivasan, said in a note today.
He said the recent masala bonds issuances have been priced at all-in-cost levels comparable to similar tenor bonds issued by these companies in domestic markets. “Given the attractiveness of masala bonds, the growth in such issuances is expected to dampen issuances of foreign currency denominated ECBs,” he added.
Overall, foreign currency denominated ECB issuance declined to $17.4 billion in fiscal 2016-17 from $24.4 billion in fiscal 2015-16.
The approvals for masala bonds surged to $2.9 billion (Rs 191.2 billion) during the fourth quarter of fiscal 2016-17 from $0.8 billion (Rs 55.7 billion) in the third quarter of the same financial year, and stood at an aggregate $4.6 billion (Rs 306.2 billion) during the fiscal 2016-17.
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Of the total masala bonds of $4.59 billion approved during fiscal 2016-17, 55 per cent was for onward lending in domestic markets, 24 per cent for refinancing of the rupee loans, and 14 per cent was for general corporate purposes.
Housing finance and asset financing NBFCs, which predominantly have rupee denominated cash flows, have emerged as the leading borrowers of masala bonds, the report said. The rating agency said it expects aggregate FII debt inflows of $5-10 billion (including masala bonds) during fiscal 2017-18.
However, the attractiveness of the debt segment for FII investors is function of the rate hikes in advanced economies and the interest rate spread available in the domestic debt markets.