Masala bonds gain currency after a pause

NARAYANAN V Chennai | Updated on October 07, 2020


Stable rupee, growing risk aversion and tight liquidity push India Inc towards this tool


Overseas borrowing through rupee-denominated bonds (masala bonds), which has been declining over the last few years, witnessed a sudden surge in interest from domestic borrowers in August.

After months of inactivity, Indian corporates raised ₹1,088 crore ($146 million) through masala bonds in August. The borrowing, although a small fraction when compared to India Inc’s overseas borrowings in foreign currency accounts for 58 per cent of ₹1,872 crore ($265 million) raised through this route in FY20.


Masala bond – a form of external commercial borrowing (ECB) – was launched by the government and International Finance Corporation (IFC) in 2014-15 to contain the account deficit, reducing rupee volatility, attracting long-term funds for infrastructure projects and internationalising the rupee. The term ‘masala’ was ascribed to these bonds to give an Indian flavour, similar to ‘Dim Sum Bonds’ of China or Turkey’s ‘Baklava Bonds’.


Unlike in ECBs, which are raised and repaid in foreign currency, masala bonds are investments raised and settled in rupees. Therefore, the currency risk is transferred to investors.

Not much ‘masala’

Despite being a corporate-friendly instrument, adoption of masala bonds as a capital-raising mechanism for Indian corporates remains abysmally low in contrast to ECBs, which touched a record high of $52 billion in FY20.

In 2016-17, Indian corporates raised a whopping ₹30,620 crore ($4,595 million) by placing these bonds in international markets. Large housing finance and infrastructure companies such HDFC, Indiabulls Housing, NHAI, NTPC besides Kerala Infrastructure Investment Fund Board have all tapped this route in the early years. However, fund-raising through masala bonds almost halved to ₹18,600 crore ($2,874 million) in FY 2017-18 and further slipped to ₹5,900 crore ($857 million) in FY 2018-19.

Less palatable

A sharp fall in coupon rates on these bonds and rupee volatility over the last few years have made the masala bonds less palatable to the foreign investors. For instance, the Indian rupee was trading in the range of 64-66 against the dollar during 2016-18. During 2018-20, it weakened to touch 68-70 levels and slipped to a record low to near 77 during the current fiscal.

Economic experts attribute that the current interest in masala bonds could be due to stable rupee outlook. “In this current environment, it is interesting to understand why a person sitting outside India is interested in investing in such a bond,” Madan Sabnavis, Chief Economist at CARE Ratings, said, adding that “the reason is that they get a much higher return than what they would be getting in their country. Normally, these investors could be from Singapore, the UK or Japan”.

Some banking experts also say that the growing risk aversion and tightening liquidity in the domestic market may have pushed the Indian companies to tap this avenue even if the borrowing cost is higher than ECBs. Although currency risk is transferred to the investors, the coupon rate under masala bonds carry a currency risk premium which makes it slightly costlier than ECBs. But raising money through masala bonds is easier as a process.

“They (investors) also look at the fact that the exchange rate in Indian has been very stable over the last couple of years. So, they could have factored 2-3 per cent fluctuation which is likely to take place and therefore they take a call on investing in these bonds,” Sabnavis said.

Published on October 07, 2020

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