The Indian government is currently exploring the possibility of issuing sovereign bonds denominated in rupees worth Rs 20,000-25,000 crore at the GIFT City in Gandhinagar, a designated financial special economic zone aimed at attracting foreign investments. This proposal represents a potential shift from India’s conventional borrowing strategy. If approved, it would mark India’s first-ever issuance of sovereign masala bonds, which are bonds denominated in rupees and offered in offshore capital markets.
What are masala bonds?
Masala bonds allow issuers to raise Indian rupees while settling in dollars, thus providing a way to access foreign funds without exposure to currency depreciation risks. GIFT City, equipped with the necessary infrastructure and capabilities, is considered well-suited to facilitate the issuance of such bonds. This move aligns with the government’s efforts to diversify the range of financial products offered at GIFT City, a financial hub with tax concessions for investments in assets traded within its premises.
Paradigm shift
While discussions are ongoing, the proposal represents a potential departure from India’s traditional approach to borrowing, which primarily relies on domestic investors. The issuance of sovereign masala bonds could offer the Indian government a new avenue for raising funds, particularly as it grapples with expanded fiscal deficits resulting from economic challenges, including those precipitated by the COVID-19 pandemic.
The current discussions encompass both policy considerations and the quantum of the proposed issuance. The decision to proceed with this proposal ultimately rests with the Reserve Bank of India (RBI) and the Department of Economic Affairs (DEA). The potential shift in India’s sovereign bond issuance strategy is being closely monitored by financial experts and investors, as it could have a significant impact on the country’s borrowing approach and its ability to raise foreign capital.
The Indian government’s fiscal deficit has ballooned in recent years, with a gross borrowing programme for the fiscal year 2024 totalling Rs 15.43 lakh crore. This underscores the pressing need for diversified borrowing options, making the proposal to issue sovereign masala bonds a pivotal development in India’s financial landscape. It has the potential to expand India’s options for raising capital in international markets, attracting attention as it evolves.
