The Reserve Bank of India has issued final guidelines allowing banks to raise rupee-denominated bonds in the overseas markets. Such bonds, also known as masala bonds, allow entities to raise funds overseas in the domestic currency, which reduces the currency risk attached to such borrowings.
While corporates were allowed to raise masala bonds starting June 2015, it was only in August this year that RBI proposed to extend this provision to banks. The relaxation came as part of a broader plan to develop the corporate bond markets put out under former RBI governor Raghuram Rajan.
In its notification on Thursday, the RBI said that banks can raise masala bonds for additional tier-1 or tier-2 capital.
Banks can issue Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and debt capital instruments qualifying for inclusion as Tier 2 capital, by way of Rupee Denominated Bonds overseas.RBI Notification
In addition to this, banks can also raise long term rupee denominated bonds overseas for financing infrastructure and affordable housing, said the RBI.
Funds raised through this route would fall under the foreign investment limit for corporate bonds which currently stands at Rs 2.44 lakh crore.
The market for masala bonds was slow to pick up but has seen some traction recently. Non banking finance companies HDFC Ltd, for instance, has raised Rs 5000 crore through such bonds. With the RBI allowing banks to issue masala bonds, there could be some pick-up in issuance although this may remain restricted to high-rated firms.
“With marquee issuers testing the masala bond market and RBI’s recent proposal allowing banks to access this route for Basel III capital, the initial success of masala bonds is likely to encourage other domestic top-rated issuers to explore this route. Beyond the top issuers, however, the market for masala bonds is unlikely to pick up in a hurry,” said India Ratings in a report on October 3.
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