Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Cheer up, London. Here comes some spice from India to improve that bland post-Brexit taste.

Housing Development Finance Corp., India's top mortgage lender, plans to raise as much as 30 billion rupees ($447 million) this week selling bonds offshore. The 37-month, London-listed securities will become the first overseas issue of rupee-denominated notes by an Indian borrower. Local-currency Chinese paper sold outside the People's Republic is known as dim sum; the Indian variant will go by masala, which means spice in Hindi.

For now, the flavor is artificial. Investors will buy and sell the HDFC debentures in dollars, but they'll earn the same returns they would lending money in rupees. It's just the first offering after a long wait. But if India does follow the now-outmoded Chinese growth model of keeping its home currency undervalued -- so there's always pressure on it to appreciate -- then masala securities could mimic the trajectory of dim sum notes, which surged to $85 billion in 2014 from next to nothing a few years earlier. And unlike China, which always had Hong Kong's capital market in its backyard, India would naturally look to London for finance. Until, of course, the bankers in London have all moved to Frankfurt, Paris or Amsterdam.

New Delhi doesn't share Beijing's lofty ambition of boosting its currency's role in global trade and international reserves. India's reason for promoting masala issuance is more mundane. Now that the central bank has made a formal commitment to low inflation, authorities hope that volatility in the Indian currency will be low enough for global investors to lend to local companies in rupees. That way, borrowers like HDFC, Indian Railway Finance and Power Finance will be spared the burden of hedging their dollar liabilities.

As it turns out, the economics of swapping dollar debt into rupees is now inferior to borrowing directly in rupees.

Rupee Debt Makes Sense
The cost difference favors tapping debt investors who want to bet on India's currency remaining stable
Source: Bloomberg
*INR swap onshore OIS 3-months is the fixed equivalent cost of borrowing overnight rupee funds at floating rates. **Mumbai interbank forward rate 3-months is the sum of USD Libor and annualized dollar-rupee forward premium.

The shifting economics is showing up in borrowers' behavior. Sales of foreign-currency debt, which peaked in 2014, have almost collapsed. Part of it may be because investments are taking longer to recover than the government had hoped. But for assets that already generate cash flows, rupee debt is emerging as a better financing option. Soapmaker Nirma, which this week pipped other suitors to a $1.4 billion takeover of three of LafargeHolcim's cement plans and two grinding stations, will pay for the business by selling 40 billion rupees in local notes.

On the Nose
While sales of foreign-currency notes by Indian companies peaked in 2014, they're not so popular now
Source: Bloomberg

India has gradually increased foreign investors' access to the domestic corporate bond market. But until the currency is made freely convertible, masala debt may be able to attract a more diverse set of international investors than Mumbai can muster.

How big can this market become? Dim sum notes hold some clues. Offshore offerings of the yuan-denominated bonds began in earnest in mid-2010 when international borrowers such as McDonald's and Caterpillar sold the securities to fund their businesses in China. Issuance peaked in 2014, but ground to a virtual halt after last August's surprise yuan devaluation. The market is starting to recover as volatility in China's currency recedes.

India's economy is less globalized than China's in 2010. But if the rupee can hold on to its post-2013 stability, and an irritating 5 percent withholding tax on offshore local-currency debt goes away, masala bonds can fill Indian companies' appetite for funds, while rustling up a dash of much-needed zing for London's palate.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. HDFC may price the notes at 8.45 percent, Bloomberg reported on Tuesday. That compares with an 8.5 percent coupon on three-year bonds it sold onshore in a private placement last month.

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Andy Mukherjee in Singapore at

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