Rising Masala Bond Issuances A Positive For Indian Companies, Says ICRA

A rise in issuance of rupee-denominated or Masala bonds in the overseas markets is a positive for Indian companies as it provides a cushion against currency risks involved in overseas borrowing, rating agency ICRA said.

“With their cash-flows denominated in Indian rupees, many of the borrowers of ECBs (overseas loans) don't have a natural hedge against foreign currency risks inherent in that instrument,” said Karthik Srinivasan, group head-financial sector ratings at ICRA. Masala bonds provide that cushion, apart from also helping companies from the pricing perspective, Srinivasan said in a press release.

Masala bonds approvals surged to Rs 19,120 crore ($2.9 billion) in the last quarter of financial year 2016-17, according to ICRA. That compares with Rs 5,570 crore ($0.8 billion) in the same quarter a year ago. Masala bonds now account for 39 percent of the total external currency borrowings.

Higher approvals will also dampen issuance of foreign currency denominated external borrowings, increasing the popularity of Masala bonds. Housing and asset financing companies currently lead the issuers Masala bonds, as their cash flows are mostly in rupee.

However, rate hikes by the U.S. Federal Reserve will increase the cost of ECBs and Masala bonds, prompting Indian companies to borrow from the domestic market. The Fed is expected to hike its lending rate twice in 2017, according to a Bloomberg survey.

When such a hike takes place, the stability of the rupee and domestic yields will be the key determinants of the popularity of Masala bonds, ICRA said.