Masala bonds help companies diversify fund source without forex risk, says Icra

Kolkata: Rupee-denominated bonds issued to overseas investors or Masala Bonds have managed to capture the fancy of Indian companies helping them to open up a new avenue for funds without taking foreign currency exchange rate risks.

Rating company Icra said the recent increase in issuances of masala bonds in overseas markets is expected to be positive for Indian companies, especially for those who don’t have a natural hedge against the underlying foreign currency risks involved in external commercial borrowings (ECBs).

Masala bonds accounted for 39% of the total external fund raising of $7.39 billion by Indian companies during Q4FY2017, according to Reserve Bank of India statistics.

Housing finance and asset financing non-banking finance companies, which predominantly have rupee-denominated cash flows, have emerged as the leading borrowers.

Regulators have approved masala bonds for $4.59 billion in FY2017. Approvals surged to $2.9 billion in the fourth quarter from $0.8 billion in the preceding one.

“With their cash-flows denominated in 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 masala bonds issuance is hence positive for such borrowers, not only from the risk aspect but also from the pricing perspective," said Karthik Srinivasan, Icra's Group head for financial sector ratings.

Foreign currency denominated ECB dropped to $17.4 billion in FY17 from $24.4 billion in FY16.