Masala Bond –Rupee Denominated Bond
Masala bond represents Rupee denominated borrowings made by Indian entities from overseas markets. Indian hotels and cuisines are famous in many foreign countries and one of the major attractions is the flavor of masala. This made them name the bond masala bond.
Is masala bond the first bond to carry a local favour?
Masala bond is not the first bond that carries a local flavor. Dim-sum is a popular Chinese dish famous in Hong Kong. Hence Chinese bonds were named after Dim-sum. Similarly, Japanese bonds were named Samurai bonds after the warrior community of the country.
Why is Masala bond important for India?
The success of Masala bond can play a crucial role for the economy of India. Masala bonds are Rupee denominated bonds raised from foreign market by Indian borrowers. The bonds are pegged to India Rupee and hence the issuer does not face exchange risk. The exchange risk is borne by the investor. The bonds are then listed in foreign stock exchanges to ensure liquidity and facilitate transactions.
What are the differences between Masala bonds and ECBs?
Both are basically borrowings made by Indian entities from foreign market. In the case of ECB, Indian entities borrow in foreign currency and settle in foreign currency. In a widely fluctuating market, the exchange risk associated with ECB is high and an unfavorable foreign currency movement can expose the Indian entity to huge risks. The risk, however, can be minimized by hedging the foreign exchange exposure. In ECB, the borrowing in foreign currency can be carried out at low interest rate, but the hedging cost is high. If, the company decides to face the risk of foreign exchange fluctuation and keeps the exposure un-hedged, sometimes unfavorable movement can become highly detrimental for the company.
In the case of Masala bonds, the cost of borrowing is high compared to ECB, but overall cost is less as the Indian entity does not need to address exchange rate fluctuation. In the case of Masala bonds, the exchange risk is borne by investor though settled in Dollar.
What are the advantages and disadvantages associated with Masala bonds?
1. Expectations of foreign investors and competitions will prompt Indian Government and regulators to fasten bond market reforms. A vibrant Indian bond market will provide a good investment opportunity for Indian savers.
2. If overseas investors become enthusiastic about Masala bonds, it will strengthen Indian currency. Thus Masala bonds can be good for Indian rupee, interest rates and economy as a whole.
However, over reliance of Indian entities on overseas market for debt even if denominated in Indian currency, can become negative from the perspective of rating agencies. Hence, just like masala in curries, presence of masala bonds in the balance sheet of Indian company and overall outstanding for the country under the portfolio should be in optimum quantity.
Which are the prominent Masala bond issues?
Some of the major Masala bond issues are
1. The International Finance Corporation (IFC) raised a Rs. 1,000 Crore bond to fund infrastructure projects in India. IFC, the World Bank investment arm made the bond issue in March 2017. The bond with tenure of 15 years is listed on the London Stock Exchange (LSE). The bond was then renamed to Masala bond by IFC.
2. Housing Development Finance Corporation (HDFC) raised Rs. 1,000 Crore in March 2019.
3. Kerala Infrastructure Investment Fund Board (KIIFB) raised Rs. 2,500 Cr in March 2019 through Masala bond route and thereby Kerala became the first Indian state government to issue Masala bond.
4. Indian Renewable Energy Development Agency (IREDA) raised Rs.1950 Crore Green Masala Bond with 5 year tenure in September 2017.
5. Axis Bank, NTPC, REC are some other major Indian corporates that issued Masala Bonds
