Masala bonds widen funding sources sans currency risks: Fitch

The issuance of rupee-denominated offshore bonds, also known as ‘Masala’ bonds, by domestic firms will help larger issuers diversify their funding sources without taking on currency risks, Fitch Ratings said today.

The Reserve Bank of India in late September announced relaxed rules 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 Masala bonds in the international market.

“The ability to diversify funding 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,” Fitch said in a statement.

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 USD 750 million per year limit for borrowers — though a firm can exceed this limit with the 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,” the statement said.

As Masala bonds are denominated in rupees, foreign investors will be taking currency risk. Also, 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,” Fitch said.

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,” the statement said.

Smaller, sub-investment-grade issuers may not find the Masala bond market practical.

“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,” Fitch said.

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