Retail Banking- Masala bonds

Retail Banking- Masala bonds

Masala Bonds represent the bonds issued for rupee denominated borrowings by Indian entities in overseas markets.

The International Finance Corporation (IFC), an investment arm of World Bank, issued Rs.1,000 crore bonds (which named it Masala Bonds) to fund infrastructure projects in India in Nov 2014.

These bonds were listed on the London Stock Exchange (LSE).

The name Masala bonds was chosen to give a flavour of Indian culture and cuisine.

The debt instruments (bonds) have been named after food stuffs in the past also (Chinese bonds, named Dimsum bonds after a popular dish in Hong Kong, Japanese bonds named Samurai after the country’s warrior class).

Benefit of issuing Masala Bonds:

An Indian company or issuer of an overseas bond offering bonds in foreign currency runs the risk exchange price fluctuation (foreign exchange risk).

The weakening of the Rupee during the tenure of the bond can add significantly to costs at the time of redemption or repayment.

By pricing or issuing bonds in Rupees, is able to pass on the exchange risk to the investors.

In addition, borrowing overseas can be relatively cheap

compared to borrowing in India, with average costs difference

of at least 200 basis points.

Further, it offers new and diversified set of investors for Indian companies, and more liquidity in exchanges such as London, apart from bank funding and the corporate bond market in India.

Benefit to foreign investor:

An investor buying such bond gains around 200 basis points above the globally accepted pricing benchmark LIBOR (London Inter-bank Offered Rate) after hedging for foreign exchange risks. With India’s GDP or national income rising, and projected to grow at a reasonably fast rate over the next few years, many overseas

investors may like to buy into such bonds to earn higher returns compared to the US and Europe where interest rates are still low.

Impact :

Many Indian companies with large borrowings abroad do not hedge their debt exposure or cover their risks. From the external balance sheet management point of view, issue of Masala Bonds will provide a natural hedge as it not give risk to foreign exchange risk.

Investment in Masala Bonds shall be a sign of acceptance of the Indian currency in trading and settlement overseas.

This will be testing the internationalization of the Indian currency over the medium and long term.