Strong rupee bodes well for India's masala bonds

With the strengthening Indian Rupee (INR) against US Dollar, masala bonds are finding more favour with Indian companies looking to raise money. 

There has been a significant increase in issuance of masala bonds since last fiscal and ICRA expects the trend to continue especially for companies that don't have a natural hedge against foreign currency risks involved in external commercial borrowings (ECBs).

Overall in FY17, masala bonds market stood at Rs 30,620 crore whereas, foreign currency denominated ECB issuance decelerated to Rs 1,740 crore in FY17 versus Rs 2,440 crore in previous fiscal.

Karthik Srinivasan, Group Head-Financial Sector Ratings, ICRA Limited, said, “With their cash-flows denominated in Indian Rupees, many of the borrowers of ECBs don’t have a natural hedge against foreign currency risks inherent in that instrument."

The trend of increasing RBD issuance is hence positive for such borrowers, not only from the risk aspect but also from the pricing perspective. 

Sectors like housing finance and asset financing NBFCs have emerged as the leading borrowers of masalabond markets. 

From the total Rs 30,620 crore, 55% was for lending in the domestic markets, 24% for refinancing INR loans and remaining 14% general corporate purposes.

Srinivasan added, “If the rupee remains stable at current levels or appreciates further, it would offer RDBs’ investors healthy returns and sustain their interest in participating in future issuances; and vise versa. “

So far, INR has appreciated over 5% against US Dollar and has turned out to be the best performer compared to its peers.

ICRA expects aggregate FII debt inflows of $5-10 billion (including RDBs) during FY18. 

The agency said, "The attractiveness of the debt segment for FII investors is function of the rate hikes in advanced economies and the interest rate spread available in the Indian debt markets."

"The possibility of further rate hikes by US Federal Reserve during CY2018 will push up the cost of ECBs as well as RDBs, and may prompt Indian corporations to tap more funds from domestic markets," added ICRA.