RBI allows banks to raise masala bonds

 In a bid to encourage the overseas rupee bond market, the Reserve Bank of India (RBI) has allowed banks to raise capital through masala bonds in the overseas markets.

“It is proposed, in consultation with the government, to permit banks to issue perpetual debt instruments (PDI) qualifying for inclusion as additional tier I capital and debt capital instruments qualifying for inclusion as tier II capital, by way of rupee denominated bonds overseas,” RBI said.

It is also proposed to allow banks to issue rupee denominated bonds overseas, under the extant framework of incentivising issuance of long-term bonds by banks for financing infrastructure and affordable housing, RBI added.

The central bank also allowed entities exposed to foreign currency risk to hedge up to $30 million. “In order to further ease participation and also align regulations, the RBI will now permit entities exposed to exchange rate risk, whether resident or non-resident, to undertake hedge transactions with simplified procedures, up to a limit of $30 million at any given time,” RBI said.

Permissible products

The exposed person will be free to access any market (OTC or exchange), and use any of the permissible products at his discretion. Authorised dealer (AD) banks will monitor adherence to this limit on the basis of periodic reporting by the exposed persons, RBI said.

In addition to the above limit for exposed persons, AD banks may, based on their assessment of the risk management capabilities of customer, allow an open position limit of up to $5 million.

This measure is intended to improve liquidity and depth in the foreign exchange market, and the limit will be revised from time to time based on experience, RBI added.

RBI has said that it will also review the guidelines for hedging of commodity price risk by residents in the overseas markets. “It is proposed to review the existing framework for hedging of commodity price risk in the overseas markets with the objective of addressing the commodity price risk management of Indian companies during the development phase of domestic commodity derivative markets. The review is proposed to be carried out by a group with members drawn from RBI and Sebi and a few external experts,” RBI said.

The central bank also eased some norms for foreign portfolio investors (FPIs). “FPIs will be given direct access to negotiated dealing system-order matching (NDS-OM) to ease the process of investment in debt securities. It has also been agreed with Sebi to provide FPI facility to trade directly in corporate bonds,” RBI said.

Masala money

RBI allows banks to raise capital through masala bonds in overseas bond markets
It has been proposed to allow banks to issue rupee denominated bonds overseas
RBI has allowed entities exposed to foreign currency risk to hedge upto $30 m