According to a source, early-stage discussions are underway for a debut issuance of around Rs 20,000-25,000 crore. The government aims to tap into the interest of Foreign Portfolio Investors (FPI) in Indian bonds in the GIFT city. By diversifying borrowing sources, the government also aims to raise funds through masala bonds at a lower interest rate.
Masala bonds are offshore sovereign bonds denominated in Indian rupees. They are named after India’s spices-based signature cuisine. Until now, the government’s borrowing program has been limited to domestic investors, with foreign players allowed to invest within certain limits. Complete overseas investment is only permitted in a few specified securities eligible for inclusion in global indices. However, as the bonds are denominated in rupees, overseas investors face the risk of adverse currency movements.
The GIFT City houses branches of major global banks, including Deutsche Bank and Standard Chartered Bank, which act as custodians of foreign investment flows. International Financial Services Centres Authority Chairman K. Rajaraman recently stated that the government was considering issuing a masala bond at the GIFT City, with the final decision to be made by the Centre and the RBI. However, no proposed issuance amount was mentioned. The IFSCA is the regulator of the GIFT International Financial Services Centre.
While Indian corporate entities have issued masala bonds in the past, the government has not yet taken this step. The COVID-19 pandemic has led to a significant increase in government borrowing as the Centre expanded its fiscal deficit to support the economy. In FY24, a record high gross borrowing program of Rs 15.43 lakh crore has been announced.
Despite the RBI’s monetary tightening measures, domestic bond yields have remained relatively stable over the past year. However, yields have recently hardened as the central bank plans to conduct open market bond sales to reduce liquidity in the banking system.