Mumbai, September 7, 2017

The rupee-denominated bonds, popularly known as masala bonds, are likely to add to the nation’s external liabilities even if they don’t hold any risks to currency movement, a top Sebi official said on Wednesday.

“When money flows into the country from foreign investments, we are attracting some risks and it is not currency risk alone. Masala bonds don’t hold any currency risks but at the same time, the external liability of the country goes up. This needs to be kept in mind,” Sebi whole- time member G Mahalingam said here. “And a huge amount of foreign inflows at a time when the currency has been substantially appreciating is something the regulators must be concerned about,” he said, addressing a capital markets summit organised by industry lobby Ficci.

Accordingly, Mahalingam said, “We need to be very careful as far as allowing the foreign flows into the country is concerned. We can think of maybe different ways of allowing these flows in under a calibrated system.” The masala bonds are debt instruments through which designated domestic entities can raise funds by accessing overseas capital markets, while the bond investors hold the currency risk. In fact, the World Bank arm IFC thus far has raised the largest amount through this instrument.

According to some estimates, the masala bonds accounted for 39% of the total ECBs of $7.39 billion reported by the RBI in the fourth quarter of FY17, while the approvals for the same rose to $2.9 billion over $0.8 billion in the third quarter. For the full fiscal of 2017, the aggregate stood at $4.6 billion, according to a recent Icra data.

Of the total masala bonds of $4.59 billion approved during FY17, 55% were for onward lending in domestic markets, 24% for refinancing of the rupee loans and 14% were for general corporate purposes.

[The Deccan Herald]