Food and finance may make for strange bedfellows, more so when the effort is to impart an exotic flavour to otherwise staid debt instruments. But that’s what the Chinese did with “dim sum bonds” denominated in yuan, first issued in Hong Kong in 2007 and then in London in 2012. These bonds became popular with foreigners mainly because of the Chinese renminbi’s appreciation, making them a safe investment avenue. Now, it is India’s turn. During his recent UK trip, Prime Minister Narendra Modi announced that the Indian Railways would issue rupee-denominated “masala bonds” in London to raise cash for its network expansion.
While Modi pointed to history — how the railways’ journey in colonial India had originated in London’s financial markets — British Chancellor of the Exchequer George Osborne expressed hope that the new bonds would catch on as well as chicken tikka masala, a perfect illustration of an Indian dish adapted to suit English palates. Osborne, of course, won’t mind both the Chinese and Indians using London as a centre for fund-raising, especially with the UK banking sector steadily losing market share to rival hubs like New York, Hong Kong and Singapore.
From India’s perspective, masala bonds help to expand the issuer’s menu of options, beyond simply raising expensive rupee debt at home or borrowing in foreign currency (no less cheap if the cost of hedging against exchange rate risk is taken into account). In this case, rupee-denominated bonds can be issued to overseas investors, who may be satisfied with a lower return than their Indian counterparts. So long as the rupee does not depreciate as fast as its domestic buying power — foreign investors, after all, do not have to buy dal and pyaaz here — the interest rate on masala bonds is likely to be lower than that on debt issued in India. That definitely works to the advantage of companies with good credit ratings. While they will now be able to mobilise money at lower rates abroad without worrying about currency risk, it is bad news for banks though, as they would be left with financing less creditworthy borrowers.