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The endless Indian romanticism with masala chai is perhaps the most common occurrence in pursuit of our everyday life. It is perhaps in the winters and monsoons that this pursuits picks up steam. It is not sheer happenstance if you adhere to this analogy that the bonds brought into the Indian economy to energize its investment slumber and recover from the malaise of non-performing assets are also (quite understandably) called ‘Masala bonds’. My article addresses the flavor these masala bonds bring in to the Indian economy? What are these masala bonds and how must spice can these add to Indian financial market recipe?

These masala bonds have given another source of investment for foreign capital that is of dire need in the infrastructure sector. Prime Minister Narendra Modi during his recent visit to London spoke about the much-maligned (for traditional dogma) Indian railways issuing bonds, which are rupee denominated for overseas funding. This is not by any stretch a common occurrence as overseas debt funding for Indian companies have always been in foreign currency denominated bonds.

To understand masala bonds let us get an understanding of what bonds are. Bonds are basically debt instruments where the issuer owes a debt to the buyer and are obliged to pay an interest or principal amount later. In India before masala bonds came into light, Indian companies often resorted to ECB (external commercial borrowing) to access foreign capital on foreign currency denominated bonds. ECB’s gave way for corporate and PSU to raise funds abroad with low interest rates of international financial market compared to domestic borrowing. However these external commercial borrowing led to increase in external debt of country with an increase from $305 billion in March 2011 to $485 billion as of in March 2016 due to rupee volatility. This raised the issue of sustainability of external debt with Indian Inc’s defaulting on redemption payment of borrowing. For India to remain an attractive investment destination and further its growth rate to stabilize this deficit was of prime concern. Along with the rise in external debt was the dark cloud of NPA’s lurking over the Indian banking system which had crossed the 6,00,000 crore bad loans mark. The Indian solution? Masala bonds.

Masala Bonds in rudimentary terms are rupee denominated bonds issued by the Indian companies to foreign investors for overseas debt funding with the currency risk borne by the investors. These bonds were first issued by International Financial Corporation, (private sector arm of World Bank) of 1000 crore for 10 year maturity for funding infrastructure in India and were listed in the London Stock Exchange. Masala Bonds get its euphemism from the Indian cuisine and the spices that India is globally known for, similar to the Samurai bonds of Japan and Dim Sum bonds of China.

If we look from an issuer perspective masala bonds are issued by Indian entities into offshore market settled in dollars. The rupee denominated bond is an attempt to protect issuers from currency risk and instead transfer the risk to investors buying these bonds. The major importance is that currency risk will be borne by the buyer of the bonds in case the rupee depreciates. To give a clear picture let me explain how it returns and the risk of it:

For example, a company issues 500cr value of masala bonds with a promise to return at a value of 600 cr. The buyer will purchase bonds in terms of rupee at whatever the rate to the dollar is. At the time of repayment he will get 600cr worth of bond in dollar terms with whatever the rate to rupee is. (Changing scenario of the rupee)

At the time of issue

The value of bond in terms of rupees: Rs 500, 00,000(500cr Rupees)

INR/USD rate at the time of issue: Rs 50/1$

Value of Bond in terms of Dollar: $1,000,000(1million USD)


At the time of Return

The payment on maturity in rupee term: Rs 600, 00,000(600cr Rupees)

INR/USD rate at the time of repayment: Rs 60/1$

So the value of Bond in terms of dollar at the time of repayment: $1,000,000(1million USD)

This is the example of how this bond is issued to foreign investor .The risk is on the investor, that is due to rupee depreciation the rate to dollar decreased. Therefore at the time of maturity the return in terms of dollars is what was invested in terms of rupee.

Earlier, in dollar denominated bonds the issuer had to face the currency fluctuations. In the case of rupee depreciation, the issuer has to pay the cost he incurred to the value of dollar while repayment of the amount. In these masala bonds currency risk is borne by the investor and during the repayment of the bond coupon and enchasing the maturity amount.

The IFC (International Finance Corporation) issued the first masala bonds in 2013 of 1000 crore with a maturity for 10yr. With this RBI has permitted banks to raise money from these rupee denominated bonds establishing guidelines with issue limit up to $750million with pricing cap of various tenure. The Finance minister has also cut the withholding tax (tax deducted at source from investors) on interest income from 20% to 5% making it further more attractive. Also tax from capital gain due to rupee appreciation will also be exempted. With these clarification taxes many companies decide to issue masala bonds. NTPC has raised 2000cr from issuance of masala bonds with a maturity of 5 yrs. Indian Railways, Yes bank and other banking and non-banking financial companies are planning to issue these masala bonds.

The masala bonds give a new set of portfolio for foreign investment. With the positive nod from the RBI and New Delhi’s decision to exempt taxes have made these bonds extremely attractive. For foreign investors, the interest rates on these bonds (5-7%) are far more lucrative than their domestic bond counterparts. However one backdrop is the problem of NPA’s in the country that might give a few hiccups to the investors, especially towards public sector banks, which have weak balance sheets. One major advantage is that the GDP growth rate of the country is above the 7% margin and the rupee stability is at around 60-65:1 to the dollar. With more investments through these channels, companies have an opportunity to meet their capital requirement and further fund infrastructure projects. Only major firms with high credibility have been able to issue these bonds. This will further encourage the small-size businesses to boost their activities in order to perform better, further increasing their credibility. S&P have predicted that masala bonds will reach 5$billion dollars in next two-three years. These masala bonds are a welcome step for the situation in India, which may realize its potential to be the most destined location investment. It will help our capital markets and further help in internalization of the rupee in the Global economy and achieve full rupee convertibility.

What these bonds also signify is the change not only in the perception but the very functionality of the Indian economy. India has long tried to develop a perception that our sheer numbers make us a formidable economic power. However, for the first time since the 1991 reforms this rhetoric seems to have found its market. The world today has bought into the dream that is India, and more importantly the economy development that it is about to bring.


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