Article 7.1 The rise ofthe... Masala bond?
By James Crabtree
Financial Times April 10, 2014
The World Bank's move doubling to $2bn its offshore-rupee bond programme today marks a significant moment in the international development of India's currency.
But it leaves one big question unanswered: what should these new Indian instruments be called?Offshore debt naming is not difficult: just pick a food or animal commonly linked to the country in question, and add extra points for alliteration.
China manages both of the above, with ‘dim-sum' offshore renminbi bonds and ‘panda' bonds for those from non-Chinese entities, such as the Rmb500m ($80m) issuance brought out by Germany's Daimler last month.
Almost every other country follows the same pattern, from tasty baklava bonds in Turkish lira, to lively kangaroo bonds down under.
Yet even when the International Finance Corporation, the World Bank's private sector arm, launched its first $1bn rupee-linked programme last year, an Indian equivalent failed to stick.
India hardly lacks for recognisable food and fauna, while a handful of local media outlets did begin speculating last year. The ‘samosa bond' might soon take hold, one said; another floated the rather blander ‘tiger bond' as an option.
But the IFC has so far distanced itself from any attempts to attach a cheery moniker to its programmes. Those familiar with the group's thinking say it is being extra-cautious, for fear of riling one of India's famously vocal and prickly lobby groups with its endorsement.
Yet the IFC's new $2bn programme will in time be followed by numerous other offshore rupee issuances as the Indian economy grows in coming decades, leaving the naming issue as something of a conundrum.
And what about [our] favoured option: the masala bond? Unquestionably Indian in flavour, the title could just catch on, says Eswar Prasad, professor at Cornell University and a particular expert on India's gradual capital account liberalisation.
‘Masala bonds might well resonate,' he says.
‘Certainly foreign investors seem to like their taste so far, even if they are still a bit spicy and exotic, you might say.'FT
Source: Crabtree, J. (2014) The rise of the... Masala bond?, Financial Times, 10 April.
For investors, foreign bonds carry the disadvantage of being subject to currency fluctuation. For example, a £100,000 foreign bond bought by a US investor when the exchange rate was $1.60 to the £ would cost $62,500. Three years later, the bond reaches maturity and the investor receives back the par value of £100,000, but now the exchange rate is $1.85 to the £, so he receives only $54,054 and makes a capital loss.
Another disadvantage for investors is that foreign bonds are traded on foreign markets where investors do not have the same degree of protection as they would in their own domestic market. Political unrest or disputes could cause investors to lose control of their foreign investments as the foreign government could ban all payments on externally raised finance. Not infrequently investors in foreign bonds have found their coupon payments subjected to an extra withholding tax imposed by the country where the bonds are issued.
Nevertheless, institutional investors taking foreign bonds into their portfolios are able to achieve greater diversification and hedge against foreign currency fluctuations. Not all foreign bonds are issued by companies - Article 7.2 discusses the foreign bond issued by the Bulgarian government.