Spice off masala bonds; here is why

Attractiveness of masala bonds may diminish viz-a-viz onshore corporate bonds as overseas investors seek the flexibility of investing in lower duration assets after Reserve Bank of India (RBI) allowed foreign portfolio investors to invest in corporate bond maturing in one year as against three years stipulated earlier.

“The greatest dissonance created by the new norm is that it will turn away a lot of new class of investors from masala bonds to onshore Indian corporate bonds as they seek the flexibility of investing in lower duration assets of one-three years,” a top Singapore-based debt fund arranger said.

Masala bonds are bonds issued outside India to overseas investors but denominated in Indian rupee, and as such the currency risk is not borne by the issuers.

The central bank, last week, permitted foreign portfolio investors (FPI) to invest in onshore corporate bonds with minimum residual maturity of one-year and above compared with earlier maturity need of three years. RBI has, also, restricted FPIs to hold not more than 50% of any issue of a corporate bond. Further, FPI also cannot hold more than 20% of its corporate bond portfolio in a single corporate.

However no such reviews were done for masala bonds, where the minimum maturity remains at three years.

Indian companies are thus clamouring for lowering the minimum tenor applicable while issue of masala bonds to one year from the current three years. Corporates are also seeking RBI to relax the minimum five-year tenor to three years in case of masala bonds worth over $150 million.

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Indian Bond yield curve set to steepen on recent tweaks in FPI investment norms Also, the gap between the yields offered on the short-term and long-term Indian sovereign debt is likely to increase on the back of the revisions announced by the RBI to boost overseas investment funds in short-end gilts. The central bank last week, withdrew a rule that mandated FPIs to invest in government bonds with at least three years of residual maturity. RBI has increased aggregate FPI investments in a single government bond to 30% of outstanding stock from 20% earlier.

Shorter-maturity bonds led a rally in Indian sovereign debt on Wednesday after the central bank widened the scope of investment for foreign funds in one of Asia’s highest-yielding markets.

The yield on bonds maturing in 2021 slumped 10 basis points (bps) to 7.47%, while that on notes due in 2022 slipped 6 bps to 7.72%. The benchmark 10-year yield was down 4 bps at 7.73%. 

Source: DNA Money