India’s central bank allows India Inc. to issue ‘Masala Bonds’

Mumbai, Sep 29 (IANS) The Reserve Bank of India (RBI) on Tuesday allowed India Inc. to issue rupee-denominated bonds overseas as another source of credit and shield it from currency swings, and also allowed foreign funds to invest in state securities with a cap.

The rupee-denominated bonds, which are often called “Masala Bonds”, were proposed in the first bi-monthly monetary policy for 2015-16. The bonds, with a minimum tenure of five years, call for their redemption in rupees.

According to the RBI, based on the comments received on the draft framework and in consultation with the government, it was decided to permit Indian corporates to issue rupee-denominated bonds with a minimum maturity of five years.

The ceiling of such bonds — a similar offering of which was made by the International Finance Corporation — will come under the prescribed limits allowed for foreign investment in corporate debt, which is at present set at $51 billion.

“There shall be no restriction on the end use of funds except a small negative list,” RBI Governor Raghuram Rajan said in the fourth bi-monthly monetary policy statement for 2015-16.

The government and India Inc. welcomed the move, stating that the move will open up new avenues for raising funds. But some felt only large corporate houses with resources at their disposal to approach global markets may be able to issue such bonds.

“Rupee denominated bonds are basically making an additional source of raising funds and importantly they already hedged. Also, there is no ‘end-use’ restriction. Personally, I feel, it is also like internationalization of rupee,” Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services, told IANS.

Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS: “The move will definitely open up another avenue for raising funds for the Indian corporations. However, the ability of raising such funds will depend upon the size and the reach of such corporates.”

This apart, the Reserve Bank said that it also intended to provide a more predictable regime for investment by foreign funds and decided to raise their exposure limits in phases in central government securities to 5 percent of the outstanding stock by March 2018.

“The limits will be increased from the existing 3.8 percent to 5 percent of the outstanding stock of government securities by March 2018, implying an increase by about Rs.120,000 crore from the existing limit of Rs.153,500 crore,” Economic Affairs Secretary Shaktikanta Das said.

In another key decision, the central bank set a separate limit for investment by such funds in state development loans, which are to be increased in phases to reach 2 percent of the outstanding stock by March 2018.

“This will amount to about Rs.50,000 crore by March 2018 and Rs.7,000 crore would flow into state government securities during the current financial year. This will bring higher liquidity in these state government bonds,” Das added.

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