RBI allows multilateral FIs to invest in masala bonds

The Reserve Bank today permitted multilateral financial institutions to invest in rupee denominated bonds popularly known as ‘masala bonds’ issued by Indian entities. This decision will allow multilateral agencies like Asian Development Bank (ADB) and BRICS led New Development Bank (NDB) to invest in these bonds. It also provides more choices of investors to Indian entities issuing rupee-denominated bonds abroad. The Masala bonds refer to rupee-denominated bonds through which Indian entities can raise money from foreign markets in rupee, and not in foreign currency. Basically, they are debt instruments that are typically used by corporates to raise money from investors. In order to provide more choices of investors to Indian entities issuing rupee denominated bonds abroad, it has been decided to also permit multilateral and regional financial institutions where India is a member country, to invest in these rupee denominated bonds. Meanwhile, the RBI has withdrawn the instruction regarding submission a fortnightly return on Forward Rate Agreement (FRA) and Interest Rate Swap (IRS) to Monetary Policy Department with a copy to various departments of the central bank.

The issuance of rupee denominated bonds, Indian entity is protected against the risk of currency fluctuation, typically associated with borrowing in foreign currency. Masala bonds also help in internationalization of the rupee and in expansion of the Indian bond markets. These bonds are usually traded on the London Stock Exchange (LSE) and not in India.The first Masala bond was issued by the International Finance Corporation (IFC), the investment arm of the World Bank dubbed as Uridashi Masala Bonds in November 2014. The Housing Development Finance Corporation (HDFC) was the first Indian company to issue rupee-denominated bonds “masala bonds” on London Stock Exchange (LSE) in July 2016. International Financial Corporation was first time issued green masala bonds in August 2015 to raise private sector investments that address climate change in India. Canada’s British Columbia province was the first foreign government to issue of masala bonds.

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