India: Rajan reveals Masala bond rules
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India: Rajan reveals Masala bond rules

Annual cap of $750 million, five-year maturity; corporates, real estate and investment trusts can issue.

Raghuram Rajan India-R-600

RBI governor Raghuram Rajan recently excited and frustrated issuers and investors in equal measure

The Reserve Bank of India has killed two birds with one stone by relaxing the rules on issuers for offshore-listed, rupee-denominated debt, say market participants.

The central bank has opened up a vital new funding avenue to cash-hungry domestic corporates and investment vehicles, say sources, while allowing global funds that lack a licence to buy onshore Indian securities directly and tap straight into one of the few healthy emerging markets left.

Sumit Jamuar, chief executive of SBI Capital

  Investors we speak to like Masala bonds. They like being able to access India’s growth story

Sumit Jamuar,
SBI Capital

RBI governor Raghuram Rajan excited and frustrated issuers and investors in equal measure in October, when after months of detailed negotiations he unveiled rules governing who can issue so-called ‘Masala’ bonds.

Domestic lenders, many cash-poor and struggling to deal with a mountain of toxic loans, are barred from packaging and selling the bonds. However, any domestic corporate, infrastructure investment trust or real estate investment trust can now issue up to $750 million worth of Masala bonds in any calendar year, with a minimum print maturity of five years. Withholding tax on the bonds was set at 5%, on a par with domestic corporate bonds.


India had vacillated for years about creating an offshore market for rupee-denominated debt. It took Rajan’s arrival at the central bank in September 2013 for the market really to take off. 

In November 2014, the International Finance Corporation (IFC) issued a triple A-rated, 10-year, Rs10 billion ($154 million) deal listed on the London Stock Exchange. In August 2015, the private-sector arm of the World Bank then issued its inaugural offshore ‘green’ Masala bond, raising Rs3.15 billion, with proceeds to be invested in a green bond issued by private domestic lender Yes Bank.

Some of the RBI’s aims are clear, others, less so. IFC treasurer Jingdong Hua said the central bank’s primary ambition was to champion a new financial instrument that could “connect international institutional investors to rupee financing”. 

That would suck more global portfolio capital into the domestic economy at a time when India’s macro outlook appears strong (the IMF tips growth to be 7.3% in 2015), even while many domestic firms are struggling with soaring debts and shrinking capital bases.

Masala bond issuance has slipped this year, partly due to previous regulatory ambiguity over the new asset class, and partly reflecting a broader uncertainty surrounding emerging markets. Through the first nine months of 2015, there were 22 Masala bonds worth $1.31 billion listed offshore, according to data from Thomson Reuters, against 32 sales worth $1.92 billion in the same period a year ago.

But Sumit Jamuar, chief executive of SBI Capital, the UK broking division of State Bank of India, expects issuance to rise, as investors and issuers get acclimatised to the asset class.

“Investors we speak to like Masala bonds,” says Jamuar. “They like being able to access India’s growth story, they see these bonds as offering an extra portion of positive yield, and they like the regulator. There’s a lot of trust and credibility built up around the RBI.”

The IFC’s Hua adds: “Every issuance, whether it has been listed in London or Singapore, has been oversubscribed, so there has consistently been strong appetite in these bonds, and there will continue to be strong interest for the foreseeable future.”

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That view though is based on three assumptions. The first is that global funds will continue to buy into Masala bonds, as and when they appear. The key data point will be topline domestic economic growth: if it remains north of 7%, analysts say issuance should remain strong. Sink much below it, at a time when emerging markets are under increasing scrutiny, and interest is likely to wane.

The second is the identity of, and appetite among, likely issuers. Masala bonds are great in theory, says SBI Capital UK’s Jamuar, as “the FX risk is shifted onto the on investor”. 

Issuers likely to feel comfortable with printing Masala bonds include multilaterals and agencies – several investors and bankers mention the Asian Development Bank and the new Brics Development Bank as institutions likely to print bonds in the months ahead. Others talk of domestic blue-chip firms such as Bharti Airtel, Wipro, Hindalco and Tata Steel. One analyst said that if all goes well, issuance could reach $5 billion in 2016.


Finally there is a question that might take years to answer: what India’s politicians and financial civil servants want from their currency. Rajan arrived at the central bank with a vision, says the IFC’s Hua. “He could see clearly the benefits of listing rupee bonds offshore”. Masala bonds, he adds, are “part of [his] aim of creating a truly international rupee, following in the thinking of China with the Renminbi”.

Rajan, adds Hua, “has also changed the RBI’s outlook from an insular to an outward looking institution that sees offshore listed rupee bonds as a clear sign that the currency is developing in a proper ‘normal and international way’.”

Yet his tenure is up in September 2018, and there are no guarantees that his successor will have the same desire to take the rupee to the four corners of the world.

Masala bonds are here; but it is not yet clear whether they are here to stay.

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