The recent Masala Bonds issues by HDFC and NTPC can be the start of a series of such bonds issued by Indian companies and would help in broadening and diversifying the market, according to Fitch Ratings.While HDFC ‘s issue raised Rs 3,000 crore ($ 449m) through its three-year bonds, NTPC raised Rs 2,000 by selling five-year “green” bonds, to support renewable power projects. Both issues were over-subscribed, attracting 40 and 60 international investors for HDFC and NTPC, respectively.“This will be positive for the better-quality issuers that are able to take advantage of offshore capital markets to diversify their funding sources without assuming currency risk,” Fitch said in a release.
The offshore Masala Bonds issues by HDFC on July 14 and NTPC on August 4 mark the first time Indian firms issued rupee-denominated debt overseas.Fitch Ratings says that though the Masala Bond market is in its infancy, the two issues should mitigate initial market concerns about liquidity. “That India’s first corporate Masala Bonds were issued by better-quality firms probably helped support investor demand and with their relatively attractive pricing. The bond pricing was surprisingly competitive relative to onshore funding considering uncertainty over liquidity and currency risks. We believe this could encourage other Indian issuers to go to the market,” Fitch Ratigs said.
India’s likely high growth tragectory compared to other emerging markets over the next few years would spur global investor interest in Masala Bonds. “The next test will be for issuers further down the credit curve to try tapping into this market. We believe it is likely only the large, well-known and better-quality issuers will tap the market in the near-term,” Fitch Ratings said.While buying Masala Bonds foreign investors take currency risk. However, the limited offshore liquidity in rupee, cost and availability of hedging, and investors’ view of exchange rate movements will affect pricing. So, international liquidity, foreign investor sentiment and global and domestic market conditions will determine market’s development.
Fitch maintains that non-bank financial institutions (NBFIs) could particularly benefit from offshore rupee financing. NBFIs currently rely heavily on domestic banks for funding and are likely to be incentivised to issue bonds, even for slightly higher costs, to diversify funding sources. Electricity utilities in India with assets operating under a regulated return-on-invested capital model, such as NTPC and transmission utilities, are also likely candidates.