RBI removes masala bonds from corporate bond limit 

MUMBAI: The Reserve Bank of India has removed masala bonds, or rupee-denominated
debt securities sold abroad, from the corporate bond investment limit that remains almost full
amid strong overseas investor interest.

The move will release additional space for yield-hungry foreign portfolio investors (FPI),
who can now invest up to another Rs 44,000 crore in the debt securities of companies like
Housing Development Finance Corporation and NTPC.

With effect from October 3, masala bonds will no longer form a part of the limit for FPI
investments in corporate bonds, the RBI said in a notification on Friday. “They will form a
part of the external commercial borrowings and will be monitored accordingly.” 

FPIs can invest in corporate bonds up to a maximum of Rs 2, 44,323 crore, less than 1% of
which currently remains unused.

The space (Rs 44,000 cr) left by masala bonds will be made available to domestic corporate
bond investors in next two quarters. 

Typically, top-rated government-owned entities, including NTPC, Rural Electrification Corp,

National Highways Authority of India and private players like Housing Development Finance
Corporation attract investors the most in the domestic corporate bond market. 

“The revised limit is expected to result in higher FPI flows and a likely compression in
corporate bond spreads, given the above change,” said Karthik Srinivasan, group head-
financial sector Ratings, ICRA.

In July, the Securities Exchange and Board of India had suspended the issuance of offshore
masala bonds. Such bond sales were stopped until foreign holdings of rupee-denominated
Indian corporate loans fell below 92% of the limit, the capital market regulator had said. 

Masala bonds are rupee-denominated debt sold to offshore investors, who take the foreign
exchange risk to earn higher interest rates compared with dollar-denominated overseas bond
sales. These securities gained momentum in the past year and half with the country’s largest
mortgage lender, HDFC, hitting the market first.
Other issuers included the National Highways Authority of India and NTPC.

The masala bonds were reckoned under both corporate debt and external commercial
borrowings for FPI investment. It will now be counted only under the ECB category, where a
borrower just needs to seek the RBI’s approval to sell those securities.
“Bringing masala bonds under the ECB framework will ensure better monitoring framework,
especially onsources and the purpose of investment,” said Soumyajit Niyogi, Associate
Director at India Ratings & Research.