Moody's Investors Service says that the masala bond market opens up a new source of funding for non-bank finance companies (NBFCs) and government-related issuers (GRIs) in India (Baa3 positive), although key challenges remain for the market to become a sustainable funding source.
The Reserve Bank of India (RBI) on 29 September issued guidelines allowing Indian corporates, NBFCs, real estate investment trusts and infrastructure investment trusts to issue rupee-denominated bonds overseas (masala bonds).
The RBI's guidelines will help deepen India's capital markets and provide these issuers with a way to raise funds abroad without incurring currency risk, says Alka Anbarasu, a Moody's Vice President and Senior Analyst.
At the same time, we expect investors to be cautious in taking on currency risks from emerging markets, adds Anbarasu. 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.
The masala bonds, though denominated in Indian rupees, will be offered and settled in US dollars, thus making it easier for foreign investors to participate, especially since foreign investors are only allowed to invest up to $51 billion in corporate bonds issued onshore in India.
Furthermore, as the number of issuances increases, secondary trading in the instruments will help set a benchmark for future deals.
Over the next 12 months, Moody's expects selective issuance by some of the largest Indian NBFCs, government-related issuers (GRIs) and state-owned enterprises (SOEs).
Funding remains a key credit weakness for Indian NBFCs. Regulatory restrictions prevent them from accepting current and savings deposits, leaving firms reliant on expensive and less-granular funding from wholesale markets and institutional investors.
The RBI first allowed masala bonds in 2014, when it approved International Finance Corporation (Aaa stable) and Asian Development Bank (Aaa stable) to issue rupee-denominated debt outside India.
These issuances created a benchmark yield for long-term rupee denominated corporate bonds for Aaa-rated issuers, although Moody's expects most NBFC issues to be rated at or below India's Baa3 sovereign rating.
Under the latest guidelines, Indian companies may issue masala bonds with a minimum maturity of five years and up to $750 million per annum per issues, with further issuance requiring approval from the RBI.
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