Indian Masala Bonds Back in Fashion as Modi Wins Renewed Mandate

  • At least six issuers plan to tap market after biggest offering
  • Clear mandate for reforms increases appeal of rupee assets

Indian companies are jostling to sell at least $1 billion of Masala bonds in the coming months as Prime Minister Narendra Modi’s resounding victory in state elections boosts investor confidence. 

More issuers are planning to tap the market as Modi’s majority win is seen emboldening him to take more measures to spur expansion in Asia’s third-largest economy. Foreigners are being lured to the nation’s stocks and bonds, propelling the rupee to its best first quarter since 1975.

“Modi’s win in the election certainly improved investors’ sentiment on India, as evidenced by a stronger Indian rupee,” said Neeraj Seth, head of Asia fixed income at BlackRock Inc. in Singapore. “This is supportive of Indian rupee-denominated assets such as Masala bonds as investors are exposed to the currency.”

  • Issuers planning offshore rupee debt sales in coming months include NTPC Ltd, National Highways Authority of India and Power Finance Corp., after mortgage lender Housing Development Finance Corp. last month sold the biggest Masala bond by an Indian company
  • They’ve raised just 138 billion rupees ($2.1 billion) via such sales since an inaugural transaction in July; the July-September period was the biggest quarter, with four issuers pricing 83.3 billion rupees
  • Cheaper onshore funding, a weaker rupee and worries that economic growth would decelerate after demonetization slowed Masala bond offerings in the October-December quarter

Rupee Advantage

  • Modi’s renewed mandate to push ahead with his reform agenda will strengthen the Indian economy and underpin further gains in the currency, said Sudip Shah, London-based chief executive officer of Orbit Investment Securities Services Plc
  • The rupee has appreciated about 5.2 percent since Dec. 31, and was the best performer in Asia last month

Quota Concern

  • International funds will be attracted to Masala bonds also because it gives them the opportunity to invest in rupee-denominated notes without seeking investment quotas and requiring licenses, BlackRock’s Seth said
  • Portfolio investors had used 77 percent of the 1.85 trillion rupee to buy government notes and 80 percent of the $51 billion quota for corporate bonds as of April 19: NSDL data
  • Modi’s “clear mandate” now means that investors will lap up Masala notes, said Orbit’s Shah, adding that it also strengthens the view that he will come to power for a second term in 2019. “The rupee’s stellar performance also adds to the attractiveness of these notes.”
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