Masala bonds will create an alternative funding source and firms like IRFC, PFC, REC, NTPC along with big NBFCs could issue these rupee denominated overseas bonds in the next 12 months, Moody's Investors Service said today.
"Over the next 12 months, we expect selective issuance by some of the largest Indian NBFCs, government-related issuers (GRIs) and state-owned enterprises (SOEs). We would expect overseas investor demand to be highest for bonds issued by Indian GRIs and SOEs.
"Potential issuers within this group include Indian Railway Finance Corp, Power Finance Company, Rural Electrification Corporation and large SOEs such as NTPC Limited," the report titled Finance Companies-India: Masala Bonds Open New Funding Source for NBFCs and GRIs said.
In September, Reserve Bank had allowed non-banking finance companies (NBFCs) and other corporates to issue masala bonds within the broad external commercial borrowing (ECB) framework to deepen capital markets and provide these issuers with a way to raise funds abroad without incurring currency risk.
HDFC Ltd, the largest mortgage lender in the country has already announced its plans to sell up to USD 750 million of rupee bonds overseas.
Moody's Investor Service said RBI's relaxation is credit positive for the NBFCs, as masala bonds will offer them a new source of funding.
"As the market grows in size, we expect a few more well-known NBFCs to tap this route for their funding needs. We expect only the well-known NBFCs to be able to tap the masala bond route, as investors will remain cautious of accepting the higher credit risk associated with the smaller NBFCs," said the report.
It expects the masala bond market to overcome some of the limitations of the domestic bond market, particularly in terms of participation by foreign investors.
"While the bonds will be denominated in Indian rupees, they will be offered and settled in US dollars. This will make it easier for foreign investors to participate in issuances, especially since foreign investors are only allowed to invest up to USD 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 issuances, it added.
However, the report has pointed out key challenges in bond market development as investors are expected to be cautious in taking currency risks from emerging markets.
"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," Moody's Investors Service said.
India's domestic bond market lags behind many Asian peers in terms of penetration. Although the domestic bond market at USD 920 billion as of June, is the fourth-largest in Asia, it represents only about 43 per cent of the GDP, significantly smaller than for many other Asian countries.
A limited participation by institutional investors -- both domestic and foreign -- is a key reason for the still slow development of the domestic bond market.
Domestic institutional investors are highly limited in their participation in the bond market, as their mandates do not permit them to make large investments in corporate bonds.
RBI, first in 2014 had allowed masala bonds by approving International Financial Corporation and Asian Development Bank to issue rupee-denominated debt outside India.
The agency expects Indian companies to issue masala bonds under latest guidelines, with a maturity of five years and up to USD 750 million per annum per issuer.
