Banks to issue Masala bonds, RBI opens currency markets

The Reserve Bank of India has announced a slew of debt market reforms to simplify participation and enhance liquidity, besides allowing the use of newly-introduced instruments such as Masala Bonds. The measures accept many of the recommendations made by HR Khan Committee.

 

Measures announced:

• RBI will allow commercial banks to issue rupee bonds in overseas markets — known as Masala bonds, both for their capital requirement and for financing infrastructure and affordable housing.
• The aggregate limit of partial credit enhancement (PCE) provided by banks will be enhanced. The aggregate PCE that will be provided by the financial system for a given bond issue will be increased from the present level of 20% to 50% of the bond issue size, subject to the PCE provided by any single bank not exceeding 20% of the bond issue size and the extant exposure limits.
• Brokers in corporate bond repos will be permitted and the platform for repo in corporate bonds will be authorized.
• It has also been decided to seek suitable legal amendments to enable it to accept corporate bonds under the Liquidity adjustment Facility (LAF).
• In order to ease access to the foreign exchange market for hedging in over the counter (OTC) and exchange-traded currency derivatives, the RBI has allowed entities exposed to exchange rate risk, both resident and non-resident, to undertake hedge transactions with simplified procedures, up to a limit of $30 million at any given time.
• Banks can also allow the customer an open position limit of up to $5 million. This is intended to improve liquidity and depth in the foreign exchange market and the limit will be revised from time to time.
• A working group will be formed to review the guidelines for hedging of price risk by residents in the overseas markets.
• To enhance participation in the corporate bond market, the RBI has decided that brokers authorised as market makers will be allowed to participate in the corporate bond repo market. This measure is expected to meet their funding and securities requirement arising out of market making activities. Currently, banks, primary dealers, mutual funds, insurance companies are only allowed. In addition, foreign portfolio investors have been allowed to transact in corporate bonds directly without involving brokers.
• With an aim to reduce risk in banking sector, RBI has also proposed to limit exposure of a bank to a business group to up to 25% of its capital, down from the existing 55%.

Masala Bond:

Masala bond is a term used to refer to a financial instrument through which Indian entities can raise money from overseas markets in the rupee, not foreign currency. These are Indian rupee denominated bonds issued in offshore capital markets.

It’s significance:

The rupee denominated bond is an attempt to shield issuers from currency risk and instead transfer the risk to investors buying these bonds. Currency risk is borne by the investor and hence, during repayment of bond coupon and maturity amount, if rupee depreciates, RBI will realize marginal saving.

Main features:

• Though raised in Indian currency, these bonds will be considered as part of foreign borrowing by Indian corporate and hence would have to follow the RBI norms in this regard.
• Under the automatic route, companies can raise as much as $750 million per annum through Masala bonds.