RBI’s Measures Towards Masala Bonds


RBI announced that banks can now raise capital through rupee-denominated overseas bonds, or masala bonds. The analogous bonds of China are called “Dim sum” while those of Japan are called “Samurai” bonds. Indian companies are allowed to raise a maximum of $750 million per year through masala bonds with a minimum maturity of 5 years.

Pros of Masala bonds:

  • Issuers carry less risk compared to the investors
  • Since these are rupee denominated, they will be shielded against the risk of foreign currency fluctuations.
  • They create a demand for rupee and would support towards the stability of the rupee

Current state of Masala bonds:

Masala bond issues are in a very nascent stage in India and only have been issued by three big names such as HDFC ltd., NTPC Ltd., and Adani Transmission. The details are as below:


Currently costlier compared to the domestic issues:

The issuers have high domestic ratings but their international ratings are only limited to the country’s sovereign rating i.e. BBB-, a shade above junk. The issuers, though big names, raised money at a cost higher than the companies would have raised in the domestic market due to the fact that the issuers had to bear the withholding tax on top of the initial coupon as the foreign investors refused to bear the tax component. Masala bonds proved to be a costlier source of raising funds for these companies as opposed to the normal. Companies might not choose to raise funds through this method if this route continues to be expensive.

Opinions of industry experts:

According to the head of treasury of a foreign bank, “The reason for going in to this market is purely the novelty factor for now. Otherwise, it makes very little sense for the companies to offer the withholding tax component every time they issue a bond. Demand for these bonds will take a long time to get established.”

Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch said, “It will take time to make Masala bonds acceptable to international investors. Demand for the bonds of lower rated companies will be quite muted. Foreigners ask far more risk premium than Indian investors who are familiar with the Indian names”.

Public sector companies might increase masala bond issuances:

During his November 2015 visit to the UK, PM Narendra Modi had promised to list $1-billion equivalent of masala bonds from government power and utility companies.

Impact of such a move:

PSUs such as NTPC, PFC, REC issue domestic bonds in the range of Rs 20-30,000 crore each every year. If masala bonds eat up a portion of these, the demand for their domestic issues will shoot up even more. Thus the interest rates on the domestic issues might come down making the domestic issues cheaper for the companies. This, perhaps, will offset some of the cost associated with the overseas bonds





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