Masala Bonds

Indian curry is quite a hit in the West. So can global investors be tempted to try out Masala bonds? That’s something the Indian Railway Finance Corporation, which recently approved the raising of $1 billion through the issue of Masala bonds and other firms such as NTPC, are trying out now.

What is it?

The term is used to refer to rupee-denominated borrowings by Indian entities in overseas markets. The International Finance Corporation (IFC), the investment arm of the World Bank, last November, issued a ₹1,000 crore bond to fund infrastructure projects in India. These bonds were listed on the London Stock Exchange (LSE). IFC then named them Masala bonds to give a local flavour by calling to mind Indian culture and cuisine. While it may seem odd to name a staid debt instrument after food stuffs, it has been done in the past. Chinese bonds, named Dim-sum bonds after a popular dish in Hong Kong, have been around for while. So have Japanese bonds named Samurai after the country’s warrior class.

Why is it important?

It was not due to a whim or loyalty to one’s country that led to such a colourful christening for the local currency bonds. Masala bonds, if they take off, can be quite a significant plus for the Indian economy. They are issued to foreign investors and settled in US dollars. Hence the currency risk lies with the investor and not the issuer, unlike external commercial borrowings (ECBs), where Indian companies raise money in foreign currency loans. While ECBs help companies take advantage of the lower interest rates in international markets, the cost of hedging the currency risk can be significant. If unhedged, adverse exchange rate movements can come back to bite the borrower. But in the case of Masala bonds, the cost of borrowing can work out much lower. The RBI in its April policy said that it would issue guidelines for allowing corporates to issue rupee bonds in overseas markets.