Understanding the Spiciness in Masala Bonds

Housing Development Finance Corporation (HDFC), which had started the process of selling Masala Bonds a year ago, found the going very tough. One year later and a negative or zero interest regime in EU and Japan meant HDFC had the last laugh. In July 2016, investors subscribed to its entire offer of Rs. 3,000 Crore Masala Bonds at 8.33% p.a starting a new era in Indian Finance sector. 

Key Features

Masala Bonds are issued in Indian Rupees to overseas investors. What marks the key difference in “Masala Bond” is that foreign exchange risk is born not by issuer but by the subscribing investor/company. As far as issuer is concerned, all its transactions are in Indian Rupees. Finance Ministry’s intention to allow issuance of such bonds stems from the fact that India lags behind major countries in pushing its currency mainstream in global financial market. 


Issuance of Masala Bonds started by International Monetary Fund’s arm, International Finance Corporation (IFC) in November 2014. The bonds were named after Masala, a well recognized term that evokes the culture and cuisine of India. These bonds are named after taking a cue from Dim sum bonds (named after Chinese cuisine), and Samurai bonds of Japan. A brief list of key Masala Bonds issued by corporates based out of India is as under:

  • IFC raised Rs. 1,000 Crores in November 2014
  • HDFC raised Rs. 3.000 Crores in July 2016
  • NTPC raised Rs. 2.000 Crores of “Green” Masala bonds in August 2016 to finance projects in green energy sector
  • Adani Transmission raised Rs. 500.0 Crore in August 2016
  • HDFC planning to raise Rs. 500 Crores in August 2016

Investor’s dilemma

Though Masala Bonds have the potential to catch a major chunk of Indian Bond market, it is lagging due to following reasons:

  1. Tax Treatment
  2. Hedging/Foreign Exchange Currency Risk
  3. Restricted to few sectors
  4. Liquidity issues

Currently, Masala Bonds are attracting 5% Withholding Tax (WT) on the gains enjoyed through selling in listed markets. Even though current investors are serious players and secondary market trading is thin, we expect the situation to improve and trade volumes to pick up, going forward. Having a WT may not be a good proposition then. All investors are expecting Indian economy to perform well and a stable USD-INR situation, any hiccup to this assumption is going to have a major impact on investors psyche. Hedging the currency risk also doesn’t make sense as the interest rate gains will be wiped out. RBI in its guidelines allowed companies or finance corporations to be able to issue Masala bonds but banks are not allowed to do so. Allowing more and credit worthy sectors/companies will help in improvement of the market further strengthening the government’s efforts to push Rupee in global markets.

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