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IFC issues new masala bonds under its $3 bn Global Rupee Bond Programme

IFC, the private investment arm of the World Bank Group, has announced a new issuance of its Rs 1.7 billion masala bond. This issue of the masala bond, listed on the London Stock Exchange, has been completely subscribed by KBC Asset Management SA, a leading European asset management company. IFC will use the money to support Indian companies preparing to issue their own masala or rupee bonds. The bonds are issued under IFC’s $3 billion global rupee bond programme. IFC’s rupee bonds are the first of its kind. Its success has led to several Indian companies following suit.

 IFC issues new masala bonds under its  bn Global Rupee Bond Programme

New masala bonds. Reuters

During his recent visit to the United Kingdom, Prime Minister Narendra Modi spoke about Indian Railways rupee bonds, which will be listed on the London Stock Exchange. The money will be used to develop railway infrastructure. This is the first time the Railways will issue rupee bonds. Other Indian companies that will soon follow include HDFC, IIFCL, Power Finance Corporation and NTPC.

Masala bonds seek to achieve two immediate objectives. One, they attract unutilized funds back into circulation. Two, they bring much-needed finance to infrastructure projects in India. Says Keshav Gaur, IFC Director, Treasury Client Solutions, "Developing local capital markets is a strategic priority for IFC. Deep, efficient local capital markets are the foundation for a thriving private sector, the key driver of jobs and growth. We are focused on India for a long time and have already established our offshore (Masala) and onshore (Maharaja) bond programs." IFC’s success with these bond programmes demonstrates a strong and continued appetite of international investors to medium and long term exposure to the Indian rupee.

Following IFC’s success, in September this year,the Reserve Bank of India opened up the masala market for Indian corporates. Gaur, who calls this an "exciting development", feels this market is now ready to take off with more and more Indian issuers becoming active. Says he, "This will provide an alternative source of rupee financing to Indian companies, especially those who want to borrow in local currency to avoid currency risks." IFC has been approached by several of these companies, which it plans to help by sharing its market knowledge and experience and, in some cases, exploring to become anchor investors or provide credit enhancements.

"Investors have shown strong demand for global rupee bonds, despite the volatility in emerging-market currencies," says IFC Vice President and Treasurer Jingdong Hua. "We have seen even greater momentum following the Reserve Bank of India’s recent approval for Indian corporations to issue masala debt. IFC will continue to support India’s capital market development and help bring international investors to India." Bob Maes, head of Fixed Income Emerging Markets at KBC agrees. He says, "We have been a longstanding supporter of IFC’s Masala Bond Programme as it offers us a simple mechanism for getting exposure to India, in a triple-A rated and increasingly liquid format."

Hua notes, in a recent blog, that India is well on its way towards achieving meaningful financial sector reform and development. Last month, the International Monetary Fund (IMF) said that India will overtake China as the world’s fastest growing economy in 2015, buoyed by a rising middle-class, a young population, and competitive labour costs. India’s capital markets must keep pace and meet the financing needs of the private sector, he says. Capital markets, that generate funds efficiently, play an important role in raising and allocating resources in an economy. These funds can and often go to critical sectors such as infrastructure, housing, and small and medium enterprises. All these are sectors that create jobs and promote growth.

Masala bonds widen the range of investment opportunities for money managers. Since these are rupee bonds, they protect the Indian issuer from foreign currency fluctuations. They are also a cheaper source of financing and attract new investors. For the investors, rupee bonds offer a reliable entry into what is perceived as the Indian growth story. They earn higher interest than they would if they invested in the US or Europe.

But, what has been achieved till now is very little, there is still some way to go. India’s bond market is a mere 10 percent of its GDP. Compare this to 18 percent in China and over 90 percent in the US However, for individual companies, raising money from selling offshore bonds is not easy. Foreign investors may hold back from investing in companies they have no knowledge of and which do not have an adequate rating. This is where IFC can play an important role. Its involvement will raise investor confidence and attract more funds.

In all, IFC has issued the equivalent of Rs 107 billion through 14 transactions in masala bonds in the past two years. The success of IFC’s Masala Bond Programme also reflects the confidence that overseas investors have in the Indian growth story. Hua says, "India continues on its ambitious reform path. The government is determined to deepen the country’s capital markets and provide Indian corporates access to onshore and offshore rupee financing. The timing for achieving our goals has never been more auspicious."

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Updated Date: Nov 19, 2015 18:34:24 IST