The Asian Development Bank (ADB) has raised Rs 850 crore from a new issue of offshore Indian rupee-linked 10-year bonds.

This represents the ADB’s first new maturity raised in Indian rupees since 2017 and contributes to an established yield curve that stretches from 2021 through 2030 with Rs 7,240 crore of outstanding bonds.

ADB’s masala bonds are listed on both the Luxembourg exchange and India INX. India INX is the country’s first international exchange, located at International Financial Services Centre, GIFT City in Gujarat.

The proceeds will be used to support local currency lending and investment in India.

What are masala bonds?

Masala bonds are rupee-denominated overseas bonds. When an Indian company issues a rupee-denominated bond, it is shielded against the risk of currency exchange rate aberrations. The forex risk falls on foreign investors.

Key advantages

* They help to internationalise the rupee and deepen the Indian financial system.

* They diversify the funding resources of Indian companies.

* They help to bring down the cost of borrowing and cost of capital.

* Allowing masala bonds is considered to be a small step towards full convertibility of the rupee.

* Such bonds lend support to the rupee’s stability.

The first masala bond was issued by the International Finance Corporation (IFC) in 2013. The analogous bonds of China are called dim sum bonds, 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 five years.

What’s the attraction for foreign investors?

For foreign investors, masala bonds are attractive as they will give a higher interest rate compared to the standard interest rates in the market. On average, masala bonds have an interest rate of 2-3 per cent higher compared to the standard London Interbank Offer Rate.

An additional benefit of masala bonds is that it will encourage foreign buyers to deal more in rupees (and products that help them to reduce exchange rate risks). Hence, the internationalisation of the rupee can be promoted by rupee-denominated bonds.

The IFC was the first major issuer of rupee-denominated bonds with the name tag of masala bonds. In September 2015, the RBI came out with detailed regulatory guidelines for the issue of rupee-denominated bonds. As per the RBI’s regulation, the money can be used only for infrastructure financing. In August 2016, the RBI allowed banks to issue masala bonds to procure money to meet their capital needs and to collect funds to finance infrastructure projects. The overall guidelines for rupee-denominated bonds will be the same as that for external commercial borrowings.

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