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India’s SOEs to issue ‘masala bonds’

Masala bonds could become a credible alternative funding source for Indian companies.

Analogous to China’s dim sum bonds, masala bonds are rupee-denominated borrowings for sale to foreign investors in overseas markets and settled in US dollars. 

Moody’s Investors Service noted that large non-banking financial companies (NBFCs) are considering issuing masala bonds in 2016.

“We expect selective issuance by some of the largest NBFCs, government-related issuers (GRI) and state-owned enterprises (SOE). We would expect overseas investor demand to be the highest for bonds issued by Indian GRIs and SOEs,” Moody’s noted.

Ajay Marwaha, Sun Global Investments’s director of investments, told Fund Selector Asia that issuers of such bonds are usually investment-grade quality companies.

Moody’s noted that potential issuers are the Indian Railway Finance Corp, Power Finance Company, Rural Electrification Corporation and large SOEs such as NTPC.

Marwaha added that masala bonds are still a new investment concept.

“For the masala bond market, these are still early days,” Marwaha said.               

The main challenge for international investors will be managing currency risks associated with the instrument.

“Offshore rupee liquidity, secondary market trading and a long-term benchmark yield curve will all need to come into being before the masala bond market can become a sustainable funding source for Indian issuers,” Moody’s said.

In 2014, the Reserve Bank of India paved the way for masala bonds by approving the International Financial Corporation and Asian Development Bank to issue rupee-denominated debt outside India.

Moody’s expects Indian companies to issue masala bonds under the latest guidelines, with a maturity of five years and up to $750m per annum for each issuer. 

Part of the Mark Allen Group.