Masala bonds, or offshore rupee bonds or rupee denominated bonds, add a unique flavour to the bouquet of investment choices available to global investors. These bonds are rupee-linked and issued in markets outside India.
Usually issued for 10 years in overseas markets and settled in US dollars, masala bonds are used to raise rupee loans for domestic companies from foreign investors. Foreign investors who have an eye on India in terms of investment can park their funds in these bonds without any direct exposure.
Features of masala bonds
For long, many Indian companies depended on foreign currency denominated debt, but the flip side was the exchange rate risk. In offshore rupee bonds, this risk is borne by the foreign investor rather than the bond seller.
These bonds are issued through the International Finance Corporation (IFC), a member of World Bank Group. The IFC converts the proceeds of the bond issue from dollars to rupees for investment in India.
The offshore rupee bonds are listed and traded on the London Stock Exchange. These bonds carry an interest rate of close to 7%, which could be later revised. They are typically given a rating of AAA, indicating high creditworthiness and solid financial backing.
Implication on Rupee
Masala bonds are a great platform to flex the muscles of the Indian rupee in the international financial markets. These bonds can help in internalization of the Indian currency and prop up the value of rupee in the overseas financial market.
The diminishing value of the Indian rupee as compared to the US dollar is always an area of concern for the business world. In these bonds, the rupee plays a
Masala bonds are a great platform to flex the muscles of the Indian rupee in the international financial markets
Players in masala bonds
All domestic companies that have the nod to raise External Commercial Borrowings (ECB) can issue rupee denominated bonds in the overseas market. Any international investor can then purchase these bonds, which are listed and traded on the London Stock Exchange. As the past has shown, most of the foreign investors buying offshore rupee bonds are European insurance companies.
Advantages of masala bonds
- The option of masala bonds has thrown open a new vista of opportunities for the local companies to raise funding.
- Domestic firms will be able to blend their debt portfolio judiciously and keep their cost of financing at the minimum. If other bonds have to be issued at an interest rate of 7.5-8.5%, masala bonds could be placed in the foreign market at close to 7%.
- The pool of investors is quite vast and varied compared to foreign institutional investors.
- These bonds have more visibility in the overseas financial market as they are listed and traded on the London Stock Exchange. This will also boost the confidence of the foreign investors in the rupee denominated bonds.
- As the masala bonds are fully denominated in rupees, there is a natural hedging in place and there is no exchange fluctuation risk for the domestic companies. The offshore rupee bonds will help domestic companies to address both pricing and currency risks while drawing in funds from foreign markets.
- The extensive trading of these bonds will also help to deepen the global debt market to the advantage of the local companies.
- Masala bonds can also boost the growth of the economy, as they will facilitate to fund raising, which could be used for the development of infrastructure.
- These bonds can attract funds from the Indian diaspora spread across the world given that NRIs would love to invest in their homeland if conditions are ideal.
Masala bonds are bound to bring more investment into the country,especially to the advantage of domestic companies. The demand for these financial instruments in the international market will increase as the liquidity of these bonds goes northwards. Moreover, the funds raised through offshore rupee bonds could be diverted for the development of infrastructure, long neglected due to lack of funds.
Written By: Adhil Shetty
Thursday, January 07, 2016 11:27:00 AM