Masala bonds

 Masala Bonds

The term is used to refer to rupee-denominated borrowings by Indian entities in overseas

markets. Masala bonds 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 rais 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

un-hedged, 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.

Masala bonds can have implications for the rupee, interest rates and the economy as a whole.

A vibrant bond market can open up new avenues for bond investments by retail savers. If

Masala bonds are acquired by overseas investors, this can help prop up the rupee. Masala

bonds are a good idea to shield corporate balance sheets from exchange rate risks.

RBI has permitted Indian banks to masala bonds to finance their Tier 1, Tier 2 capital and

infrastructure financing.

Canada’s British Columbia becomes the first foreign govt. issuer of masala bonds by

successfully raising Rs.5 billion through a rupee-denominated bond in the London Stock

Exchange.

HDFC is first ever Indian corporate to list Masala bond, chooses London Stock Exchange for

landmark issuance. Rupee denominated bond raises INR 30 billion (USD 450 million

equivalent), with 8.33% annual yield, attracting global investor support.