What on earth are Masala Bonds?

The Reserve Bank of India (RBI) has publicized a push of events to improve investor contribution and market liquidity in both- the corporate bond and the currency markets.

Masala bonds are nothing but the rupee bonds that will be issued by commercial banks in overseas market- both for their capital requisite and for financing infrastructure and reasonably priced housing.

According to an RBI statement, “Accepting many of the recommendations of the Khan Committee to develop the corporate bond market, it has been decided to enhance the aggregate limit of partial credit enhancement (PCE) provided by banks, permit brokers in corporate bond repos, authorise the platform for repo in corporate bonds and encourage credit supply for large borrowers through market mechanism.”

It is now decided by the regulator that the collective PCE that will be provided by the financial system for a given bond issue will be increased from the present level of 20 per cent to 50 per cent of the bond issue size, subject to the PCE provided by any single bank not exceeding 20 per cent of the bond issue size and the extant exposure limits.

RBI will also look for suitable legal amendments to enable it to accept corporate bonds under the Liquidity adjustment Facility (LAF).

In line to ease admission to the foreign exchange market for equivocation in over the counter (OTC) and exchange-traded currency derivatives, RBI has allowed things 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.

“The exposed person will be free to access any market (OTC or exchange) and use any of the permissible products at his discretion,” according to the RBI. 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.”

Market makers, who ate authorized brokers will help enhance the participation in the corporate bond market and will be allowed to participate in the corporate bond repo market.