The Masala Bonds

The Growing Scope of Masala Bonds

Let me begin this blog with a screenshot that i shared (prediction) during the November 2016 on twitter.
This tweet was done 6 months ago and the masala bond market had started to do a steady run but unfortunately capturing less media attention.  From a "not so popular bond" to special treatment in Union budget, the importance of Masala bond has grown over years. 
Through this blog i am looking to show the major characteristics of these bonds and its importance in India.

"Masala Bond" the name itself may not be that familiar to you but since its inception ie, 2014 when IFC raised a 1000 crore bond to fund projects in India, this name started to capture some attention.

Despite being a new "thing" the overall buzz received by these bonds at beginning where pretty lower. Since having a higher scope and reduced risk  I was pretty sure that masala bonds will gain a lot of attention. Even though, if you  search "Masala Bond" or "Rupee Bond" in google, the chances of getting a well defined or flabbergasting articles saying about the various aspects or advantages regarding the same is comparatively very lower than from most celebrated asset classes.  

So,What and Why -Masala Bonds????

Meaning: "Masala Bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency. Masala is a Hindi word and it means spices. The term was used by IFC to evoke the culture and cuisine of India. Unlike dollar bonds, where the borrower takes the currency risk, masala bond makes the investors bear the risk."
(source: Wikipedia)

In simple words, this is a mixed financial instrument where the external borrowings are done with reduced risk. 

Now lets try to answer why, these bonds:

The total borrowing by Indian corporate sector on 2016 stood around 15 billion US Dollars, which is comparatively much lower than that of previous years. Still the corporates external commercial borrowing is a major component and comprising 37 percent of India's External Debt. More alarming fact is that most of these are unhedged. Increased debts and currency fluctuations do create a big risk for the economy.

An article came on Bloomberg shows the same.

Another source showing statistics of ECB and Rupee bonds:
http://in.reuters.com/article/ecb-fccb-idINL3N1GY3ND

So it might be now clear to you why the masala bonds are useful.
In a country like India, where the currency is highly fluctuating and dollar being the largest indebted currency denomination, the scope of these rupee bonds are becoming more inevitable. The Importance of Masala Bonds are much higher in a country like India. If we see the past several months, rupee has been moved from 69 to 64 levels. Chances of a plunge in rupee is still possible at any point of time. Apart from that the recent geopolitical risks and economic events leaving the world in a VUCA environment which is not that healthy for our country.
We cannot claim that it is a easier source of finance but Masala Bonds are of greater safety than unhedged sources and in changing global conditions.

Masala Bonds and Union Budget

The Given below is a major excerpt from the article of Livemint on February 1 2017

" The rupee-denominated offshore bonds, popularly known as masala bonds, on Wednesday got a tax benefit boost with the Union budget exempting them from taxation for transfer among non-residents, while a low rate of 5% will apply for investors till 2020.

The decision to levy lower tax deducted at source (TDS) of 5% with respect to masala bonds would be retrospectively effective from 1 April, 2016."

Source: http://www.livemint.com/Politics/vVGQk2I3G11Ya8DUr9XvMM/Budget-2017-Masala-bonds-to-get-more-tax-benefits.html

Government taking steps regarding to popularise and inviting more companies to use cheaper source for raising funds. The Major advantages of Masala Bonds not only vest with investor but also to corporates and for the nation.

Still too much reliance on external debt is also quite unpleasant. Masala bonds may give a better chance but the increased debt is still a problem even though it is in rupee denomination.

The Current Interest rate is below 7 percent which is more cheaper if it was issued domestically. HDFC currently holding the name for largest masala bond listed in London Stock Exchange, many companies like NTPC, Power grid and many other players has also raised find via these bonds.

Prediction:

The rate at which external debt is growing and the growth of companies and expansion plans is showing a positive outlook for Rupee Bonds. The recent currency appreciation and events can cause a drop in external debt but the corporate borrowings seems to be increasing through masala bonds. The Bonds are more likely to get invested by overseas players. Better credit rating for the nation and new policies are expected to get more fund flow which will boost the market. Unexpected external or internal events pose risk for the same. 

The latest upcoming issues include New Development Banks 500 million US$, HDFC planning to raise 3300 crore and Shriram Transport also in frontline, the rupee bond market is pretty alive. It is still too early to conclude but Masala Bonds are of greater advantage and sustainable instrument.

Thank you.

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