Masala Bonds Current Affairs

RBI takes masala bonds out of corporate bond limit for FPIs

The Reserve Bank of India (RBI) has increased corporate bond investment limit for foreign investors by taking out Masala bonds (rupee-denominated bonds) from ambit of total debt investment limit. They will be considered as part of External Commercial Borrowings (ECBs) and will be monitored accordingly.

Key Facts

Currently, masala bonds are reckoned both under combined corporate debt limit (CCDL) for FPI (Foreign Portfolio Investments) and external commercial borrowings (ECBs). At present, limit for investment by FPIs in corporate bonds is Rs. 2,44,323 crore. It includes issuance of rupee-denominated bonds (RDBs) overseas by resident entities of Rs 44,001 crore (including pipeline). The amount of Rs 44,001 crore arising from shifting of Masala bonds will be released for FPI investment in corporate bonds over the next two quarters.

Background

With surge in inflows in Indian debt markets in current year, cumulative utilisation of FPI limit in corporate bonds stood at 99.07% as on September 2017, reflecting limited scope of further FPI investments. The revised limit is expected to allow FPIs to make additional investments of a similar amount in corporate bonds.

Masala bonds

The Masala bonds refer to rupee-denominated bonds through which Indian entities can raise money from foreign markets in rupee, and not in foreign currency. Basically, they are debt instruments used by corporates to raise money from investors. The issuance of rupee denominated bonds, protects Indian entity against risk of currency fluctuation, typically associated with borrowing in foreign currency. It also helps in internationalization of the rupee and in expansion of t Indian bond markets. These bonds are usually traded on the London Stock Exchange (LSE) and not in India.

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RBI allows multilateral FIs to invest in masala bonds

The Reserve Bank of India (RBI) has permitted multilateral and regional financial institutions (FIs) to invest in ‘masala bonds’, rupee denominated bonds issued by Indian entities.

This decision will allow multilateral agencies like Asian Development Bank (ADB) and BRICS led New Development Bank (NDB) to invest in these bonds. It also provides more choices of investors to Indian entities issuing rupee-denominated bonds abroad.

What are Masala bonds?

The Masala bonds refer to rupee-denominated bonds through which Indian entities can raise money from foreign markets in rupee, and not in foreign currency. Basically, they are debt instruments that are typically used by corporates to raise money from investors. The issuance of rupee denominated bonds, Indian entity is protected against the risk of currency fluctuation, typically associated with borrowing in foreign currency. Masala bonds also help in internationalization of the rupee and in expansion of the Indian bond markets. These bonds are usually traded on the London Stock Exchange (LSE) and not in India. 

Note

The first Masala bond was issued by the International Finance Corporation (IFC), the investment arm of the World Bank dubbed as Uridashi Masala Bonds in November 2014. The Housing Development Finance Corporation (HDFC) was the first Indian company to issue rupee-denominated bonds “masala bonds” on London Stock Exchange (LSE) in July 2016. International Financial Corporation was first time issued green masala bonds in August 2015 to raise private sector investments that address climate change in India. Canada’s British Columbia province was the first foreign government to issue of masala bonds.

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