The recent issuance of the first offshore masala bonds by two Indian companies recently should pave the way for a broader opening of the market as the inaugural issuance is likely to mitigate initial concerns about liquidity, a global rating agency has said.
"The masala bond market is in its infancy, but the two recent issues should mitigate initial market concerns about liquidity. That India's first corporate masala bonds were issued by better-quality firms probably helped support investor demand and with their relatively attractive pricing," Fitch Ratings said in a statement here.
The inaugural offshore masala bonds issued by HDFC on July 14 and NTPC on August 4 mark the first time the Indian firms issued rupee-denominated debt overseas.
HDFC raised Rs 3,000 crore ($449 million) through its three-year bonds, while National Thermal Power Corporation (NTPC) raised Rs 2,000 crore by selling five-year 'green' bonds, which Fitch rated 'BBB-(emr)', to support renewable power projects.
Both issues were over-subscribed, attracting 40 and 60 international investors for HDFC and NTPC respectively.
"This will be positive for the better-quality issuers that are able to take advantage of offshore capital markets to diversify their funding sources without assuming currency risk," the statement said on Sunday.
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"The bond pricing was surprisingly competitive relative to onshore funding considering uncertainty over liquidity and currency risks. We believe this could encourage other Indian issuers to go to the market," it said.
India's forecast of a high growth relative to other emerging markets over the next several years should help to bolster global investor interest in the masala bond market.
"The next test will be for issuers further down the credit curve to try tapping into this market. We believe it is likely only the large, well known and better quality issuers will tap that market in the near-term," it said.
Foreign investors take currency risk when buying masala bonds. The limited offshore liquidity in rupee, cost and availability of hedging, and investors' view of exchange rate movements will affect pricing, the rating agency said.
"As such, the market's development will remain especially subject to international liquidity, foreign investor sentiment, and global and domestic macroeconomic conditions," it added.
Fitch said non-bank financial institutions (NBFIs) could particularly benefit from offshore rupee financing.
NBFIs currently rely heavily on domestic banks for funding and are likely to be incentivised to issue bonds, even for slightly higher costs, to diversify funding sources, it said.
--IANS
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