Masala bonds are rupee-denominated bonds issued in offshore capital markets.
According to Fitch Ratings, the masala bonds would widen the investor pool as the domestic investor pool is limited in size given the scale of capital needed by the banks, Fitch said.
"Fitch estimates a capital shortfall of $90 billion over the next several years as Basel-III regulatory requirements build from the financial year 2017 (FY17) to FY19," the rating agency said in a statement.
The RBI's proposal came as part of a series of measures pertaining to India's fixed-income and currency markets announced on Thursday.
According to Fitch, Indian banks would find it challenging to raise sufficient additional tier-1 capital through the domestic markets.
This is the case even as most of the capital needed will be required to be denominated in rupee owing to the currency structure of most banks' balance sheets, the rating agency said.
"As such, enabling banks to issue masala bonds opens a window to a much larger investment pool while simultaneously addressing the problem of currency mismatches which had existed with previous international bond issues," Fitch said.
According to the rating agency, the masala bonds market remains in its infancy and corporates like HDFC and NTPC raised funds issuing such bonds this year.
"As such, the extent to which banks will be able to use the masala bonds channel to raise capital remains to be seen, and will depend to a large extent on the foreign investors' risk appetite and pricing," Fitch added.
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