India’s central bank has loosened rules that once prevented Indian corporates from issuing rupee denominated bonds on the international debt markets, opening up a potentially thriving new asset class to international investors.
The edict from the Reserve Bank of India, lead by Governor Raghuram Rajan, allows any domestic corporation, real estate investment trust or infrastructure investment trust to raise up to $750m each year via the issuance of so-called “Masala” bonds, which must have a minimum maturity of five years.
These debt securities are not new. In November 2014, the International Finance Corporation listed Rs10bn ($163m) worth of 10 year Masala bonds on the London Stock Exchange, with the aim of boosting foreign investment and improving India’s often-ragged infrastructure. In August 2015, the private sector arm of the World Bank followed that up with a Rp3.15bn green Masala bond, channelling the capital that it raised into private sector projects that address climate change in the world’s ninth largest economy.
But the long-expected RBI circular is expected to provide much-needed impetus to a nascent market, just as global investors show clear signs of shying away from emerging market debt. “The new rules allow domestic issuers to access global funds, some of them for the first time, while allowing funds without a foreign institutional investor’s license to invest in rupee denominated debt,” said Sumit Jamuar, chief executive officer of SBI Capital UK, the British broking arm of the State Bank of India. “This opens up the world to rupee bonds, shifts the FX risk on to the investor rather than the issuer, and should channel a huge amount of new capital into Indian companies, allowing global investors to benefit from India’s growth story.”
S. Subramanian, head of investment banking at Mumbai-based Axis Capital, said Masala bonds should, if all goes well, be “very well received. From an investor’s point of view, it gives them access to new Indian corporate paper that still offers more yield than paper” issued in the developed world. “And for Indian corporations, it’s great to have a brand new source of funding.”
Bankers said the first issuers would likely be supranationals such as the Asian Development Bank and, in time, the likes of the new BRICS development bank, as well as leading Indian corporates. “I can see this new asset class being heavily used by the likes of Tata Steel, [aluminum firm] Hindalco and major domestic corporates that really need the capital,” said Subramanian. “There’s no obvious reason why foreign institutions would not be interested in the asset class, given that it offers them an extra slice of yield, and grants them access to a typically higher-quality set of issuers.” One leading Mumbai-based banker said issuance would rise sharply, with volumes likely to reach “around $5bn” in the full year 2016.
Some worry though that Masala bonds could, due to the malaise affecting all emerging markets, prove to be a tougher sell than they would have been a year ago. IMF managing director Christine Lagarde has described India’s resurgent economy as a rare global “bright spot” set against an otherwise bleak global backdrop.
Yet even that may not be enough to generate sufficient interest in foreign listed rupee denominated bonds in the months and years ahead, as interest in emerging market equity and debt continues to decline.