Masala Bonds Just Lost Their Spice : By Andy Mukherjee

Masala Bonds Just Lost Their Spice : By Andy Mukherjee

There was a flicker of anticipation last year when an Indian borrower issued the first masala bond, a local-currency note sold outside the country. Gadfly expressed the hope that, once a thorny tax issue was sorted, the securities would go on to become the Indian version of dim sum debt, which has played a large role in internationalizing the Chinese yuan.

But the Reserve Bank of India, now under a different boss, has poured cold water into the curry.

In guidelines issued late Wednesday, the central bank imposed a ceiling on the extra yield (300 basis points over similar maturity government notes) that an Indian borrower can offer investors in London or Singapore. It also barred issuers from raising more than $50 million for less than five years.

Worst of all, it said that investors couldn’t be related to borrowers.

India imposes similar curbs on foreign-currency borrowing, but extending them to offshore rupee bonds makes little sense. Money owed to foreigners is far less likely to trigger a financial crisis when the liabilities are in local currency than when the debt to be serviced — think Indonesia in 1998 — is in dollars.

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Andy Mukherjee :: Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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