Offshore rupee-denominated bonds, known as Masala bonds, will not become a credible funding option for Indian corporates until the Reserve Bank of India (RBI) allows banks to fund in that market, a director of an Indian bank said on Tuesday.
India’s corporate lenders are short of funding options due to lack of depth and appetite for riskier debt in the onshore markets and higher costs or ratings caps on the offshore markets.
Shri B Siriam, managing director of State Bank of India, called on the RBI to open up the offshore rupee bond to India’s financial institutions in order to promote another source of funding for the country’s cash strapped corporates.
“The RBI needs to free up that space for Indian banks to be able to fund,” said Siriam. “They will then act as a frontrunner to popularise these bonds. Indian banks are well recognised out of India so should generate plenty of international interest.”
The RBI recently brought down the minimum maturity of offshore rupee bonds from five to three years in an attempt to make Masala bonds more accessible to corporates.
Several Indian companies have already made public their interest in issuing Masala bonds including Adani Transmission, Dewan Housing Finance Corp, Indian Railway Finance Corp and India Infrastructure Finance Company.
PRICE POINT
However, recent corporate roadshows have indicated that the pricing does not make sense for issuers.
“Looking at recent roadshows, my sense has been that international investors want an additional 40bp-50bp return versus what the corporates can pay onshore,” said Andrew Cross, deputy treasurer for Asia Pacific at the International Finance Corporation, an early adopter of Masala bond issuance.
He said that offshore rupee bonds could provide an important source of funding for corporates and added that demand might be driven by infrastructure projects in India.
Last month, the International Finance Corporation (IFC) sold a 15 year Rp2bn ($30m) Masala bond with a coupon of 7.1%. It marks the longest Masala bond issuance to date.
Mitra Energy, an energy provider based in India, said it would be keen for the market to open up particularly because the company’s ratings prevented it from accessing the dollar market.
“Ratings agencies take a very conservative view and we are limited by the country rating as well as currency risk and counterparty risk,” a representative from the company said on Tuesday. “Currency risk is off the table for Masala bonds. The accessibility of Indian corporates to the market should be better, particularly as we the local capital markets don’t have much depth.”
The Masala bond market is not expected to stagnate although bankers do argue that until sovereign or bank issuance is seen, it will take some time before the market is a viable funding option for Indian corporates.