Recently Reserve Bank of India (RBI) permitted multilateral financial institutions to invest in Rupee denominated bonds popularly known as ‘masala bonds’ issued by Indian entities.
Two corporations; Housing Development Finance Corporation and National Highway Authority of India (NHAI) are likely to raise funds from the international markets via Masala Bonds as the US Federal Reserve is widely expected to raise interest rates at least three times this year.
So to get up-to-date with this investment tool, this article is an effort to tell you all about the Masala bonds.
Masala bonds are a special type of financial instrument through which Indian corporates can raise funds from overseas market in INR, not in foreign currency. Suppose an Indian corporate issues Rs 20 million worth of bonds with a promise to pay back Rs 22 million in a year. Now, what a US investor has to do is lend dollars equivalent of Rs 20 million. After a year, the corporate would pay back dollar equivalent of Rs 22 million. This is quite similar to Japanese yen-denominated bonds named Samurai and Chinese yuan-denominated bonds called dim-sum bonds. It is an extremely useful financial instrument for Indian entities to raise a huge amount of funds with reduced risk and lower borrowing cost.
Benefits of Masala Bonds:
- Masala bonds will help in building up foreign investors’ confidence in Indian economy and currency which will strengthen the foreign investments in the country.
- It helps the Indian companies to diversify their bond portfolio.
- It helps the Indian companies to cut down their cost. If the company issues any bond in India, it carries an interest rate of 7.5%-9.00% whereas, Masala Bonds outside India is issued below 7.00% interest rate.
- It helps the Indian companies to tap a large number of investors as this bond are issued in the offshore market.
5. An investor will benefit from his investment in masala bonds if the rupee appreciates at the time of maturity.
Above example shows that a company invested 17.5$ and getting back 30$ after appreciation in the value of rupees.
Disadvantage of Masala Bonds
However, like everything there is a potential downside to these bonds as well. Too much of reliance on external debt aided by the issue of Masala Bonds apart from the traditional ECBs can lead to serious negative impact on the sovereign ratings of India, and thereby creating a problem in attracting investments to India. So overexposure to the masala bond would hurt investment condition of India.
So is it good for the Indian economy?
It is a good way to attract foreign capital given that India is working on many ambitious goals like Make in India, developing smart cities, digital India for which a lot of funding is needed. For this, India needs to find ways to attract foreign capital. Masala Bonds deals with the Capital account of the Balance of Payment and help build investors confidence. This will benefit Government, which has undertaken vision 2020 as its mission, so there are hopes of these bonds gaining more exposure in near future.
By Kushal Batt