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Gaining Traction: Masala Bonds

December 2016

A number of financial institutions are issuing rupee denominated Masala bonds to raise funds. But can it spice up the bond market?

The Indian corporate sector, which has used External Commercial Borrowings (ECB’s) as a way to raise funds in the past has seen systemic scares emerge time and again. The scare comes from the fear of a Currency Risk. The Reserve Bank of India officials have time and again warned companies about unhedged foreign currency exposure.

This has bought to fore a safeguard in what has come to be known as Masala Bonds – an option of raising funds on foreign soil without being concerned about currency risk. Masala bond is a term used to refer to a financial instrument through which Indian entities can raise money from overseas markets in the rupee, not foreign currency. These are Indian rupee denominated bonds issued in offshore capital markets.  The rupee denominated bond is an attempt to shield issuers from currency risk and instead transfer the risk to investors buying these bonds.

The bonds have recently been in the news after British Columbia, a Canadian province, became the first Government to issue Indian rupee denominated bonds on the London Stock Exchange (LSE). These bonds, approved by the RBI, raises INR funds from global investors outside of India. They are also referred to as synthetic bonds, since payment under the bond, is made in USD based on the prevalent rupee dollar exchange rate. British Columbia’s 3 year term masala bond has been priced to yield 6.62% on a half-yearly basis.


3 Facts For Masala Bonds

·         The first masala bonds were issued by the International Finance Corporation (IFC), an arm of the World Bank, in the year 2013.

·         Similar offerings from other countries have also been after the food or culture of that country like “dim sum” label for Chinese offshore issues or “Samurai” bonds for Japanese offshore issues.

·         Masala bonds are the first rupee bonds listed on the London Stock Exchange.


What lies behind its appeal and how does issuing bonds in rupees help an Indian issuer? As mentioned earlier, an Indian company or issuer of an overseas bond offering runs a risk on account of currency fluctuation. A weakening of the rupee, for example, over the tenure of the bond could add significantly to the costs at the time of redemption. By pricing or issuing bonds in rupees, the issuer transfers this risk on to the investor. Added to this is the fact that borrowing overseas has found favour amongst Indian corporate and others on account of lower rates vis-à-vis within India.

And why does it find favor with the foreign investor? Investor’s obviously are buoyed by returns – India’s financial behemoth, HDFC, which raised INR 30 billion in July this year was offering an annualized return of 8.33% to investors. These returns, which are at a premium to the globally accepted pricing benchmark, Libor, for one, are lure enough to counter fears emerging from foreign exchange fluctuations. With the right kind of hedging in place, the instrument enables participation in a growth story regarded amongst the fastest globally.

The benefits of issuance of masala bonds are manifold; one being it’s an ideal way to provide impetus to the Indian fixed income market. A direct benefit seen by the RBI is the internationalization of the INR resulting out of these issuances – a case in point being the rising demand for the Chinese equivalent, Dim-Sum Bonds, leading to significant appreciation of the RMB. At the corporate level, as outlined, Masala bonds will help Indian corporates reduce its interest burden on its balance sheet. Overall, the development of this space is a significant improvement over the traditional ECBs.

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