RBI’s move to allow banks to issue masala bonds will remove the obstacles for lenders in accessing additional tier I (AT1) and tier II bond capital and also widen the investors pool, says Fitch.

The Reserve Bank had yesterday announced a series of measures related to the country’s fixed-income and currency markets.

Fitch said the RBI’s proposal to allow banks to issue ‘masala bonds’ — rupee-denominated bonds issued in offshore capital markets — would ultimately deepen the market for AT1 and tier II bond issuance.

“This measure would ease a key constraint for banks in accessing new AT1 and tier 2 capital, given the limited size of the domestic investor pool relative to the scale of the capital needed,” Fitch said in a note today.

Fitch estimates a capital shortfall of $90 billion over next several years as basel III regulatory requirements build from the financial year 2017 to 2019.

The ratings agency has long maintained that the country’s banks would find it challenging to raise sufficient AT1 capital through the domestic markets.

This is the case even as most of the capital needed will be required to be denominated in rupee owing to the currency structure of most banks’ balance sheets, it said.

“As such, enabling banks to issue masala bonds opens a window to a much larger investment pool while simultaneously addressing the problem of currency mismatches which had existed with previous international bond issues,” the global agency said.

It, however, said the extent to which banks will be able to use the masala bonds channel to raise capital remains to be seen, and will depend to a large extent on foreign investors risk appetite and pricing.

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