“Masala bonds” was green flagged in September last year by Reserve Bank of India . It has been successful in the venture of increasing the international status of rupees so far.
These bonds are the rupee denominated borrowing by Indian entities in the overseas markets. This is one of the ways to raise money from foreign investors by issuing it to foreign overseas buyers. Traded in London Stock Exchange and now also in New York Stock exchange, masala bonds are settled in US dollars because of the limited convertibility of the Indian rupees. However, they are issued in Rupee itself. The bond negates the risk of rupee depreciation by earning a higher yield through coupon rate to compensate for the following risk. They bear a semi-annual coupon of 7.875% per annum and have a tenure of 3 years and 1 month. These bonds are issued at a price of 99.24% of the par value and will be redeemed at par, providing 8.33% annualized yield to investors.
HDFC was the first company to issue masala bonds and it eventually raised 3000 crores through them. Yes Bank, Indian Railways are in line and is soon to issue the bonds to raise money from the overseas market. Standard & Poors expects the issuance of masala bonds to be $5 billion annually over next 2 years.
These bonds can have implications for the rupee, interest rates, and the economy on a whole. A vibrant bond market can help prop up the rupee. It protects the Indian entities against currency fluctuation associated with the borrowings. In addition, Capital gains from rupee appreciation are exempted from tax which is helping these bonds in creating a wider investor base. However, it is likely that Indian companies would be issuing Masala bonds worth billions. And with this shaky an economy, too much reliance on external debt could be crucial. They have to be used in moderation in order to maintain stability.