Masala Bonds: How a volatile rupee is dampening their spice

Maple, Masala, Dim Sum topped with Kimchi followed by Baklava may sound like an unusual and slightly brave tasting menu. They are however a list of international bonds and following a series of foreign-denominated offshore bonds conceptualised before it, Masala Bonds were introduced in 2014 by the Indian government and International Finance Corporation. The plan was for these to help contain the current account deficit, fund infrastructure projects, fuel internal growth and internationalise the Indian rupee. So has this worked in practice or has the theory remained academic?

Masala Bonds are financial instruments through which Indian entities can raise money from offshore markets such as the London Stock Exchange. Unlike conventional bonds, these are rupee-denominated but settled in a foreign currency, so the currency risk is transferred from the issuer to the investor. The term “Masala” has been ascribed to these bonds to give them an Indian tone whilst the Chinese and Turkish variants for example are respectively known as “Dim Sum Bonds” and “Baklava Bonds”. The Reserve Bank of India set out guidelines allowing Masala Bonds to be issued by Indian companies, Real Estate Investment Trusts and Infrastructure Investment Trusts. Legally they are defined as debt securities and typically governed under English law.

The emergence of Masala Bonds as a funding vehicle for Indian entities had been cited as seminal moment for the economy, especially against the backdrop of low-interest rates in established western markets. Theoretically at least, this heightens the appeal for the higher-yielding emerging market debt. An arguable example is the recent 9.72 percent coupon rate issued by the Kerala Infrastructure Investment Fund Board, raising $312m. Such capital raises and many more hoped like it had been forecasted to be a game-changer for the Indian economy, sparking critical infrastructure projects for government agencies, and much-needed resources to invest in new products and services for Indian corporates.