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India is known in the world for its spices and perhaps that is why when bonds were issued in rupees in foreign markets, they were called spice bonds. Along with this, another bond came whose name was Maharaja Bond. Both had the same objective, to raise money from abroad for India, but both had different buyers.

A bond is a type of debt paper. When a company or government needs money, it borrows money directly from investors and in return gives a paper called a bond. It is written in it that the money will be returned after so many years and this much interest will be received every year.

What is special about Masala Bond?

Earlier, when Indian companies borrowed money from abroad, they used to borrow it in dollars. There was a problem in this that if the rupee became weak then the company had to pay more money in return. This risk reversed in Masala Bond. These bonds are issued in rupees but the buyers are foreign, hence the risk of rupee-dollar fluctuations does not lie with the company but with the investor.

Where did Maharaja Bond come from?

When IFC i.e. International Finance Corporation issued bonds in rupees, it gave two names. The bonds which were sold to foreign investors were called Masala Bonds and those sold to Indian investors were called Maharaja Bonds. In 2014, IFC issued the first masala bond and raised Rs 1,000 crore to fund infrastructure projects in India. In 2015, IFC also issued Green Masala Bonds which raised Rs 315 crore for climate change projects.

Which companies did this?

In July 2016, HDFC became the first Indian company to issue masala bonds. HDFC listed bonds worth Rs 3,000 crore on the London Stock Exchange and raised a total of Rs 5,000 crore in four tranches at an interest rate of 7.875 per cent per annum.

In August 2016, NTPC (National Thermal Power Corporation Limited) issued Green Masala Bonds worth Rs 2,000 crore for renewable energy projects. In 2019, Kerala-based KIIFB (Kerala Infrastructure Investment Fund Board) issued masala bonds worth Rs 2,150 crore on the London Stock Exchange, a first for an Indian state.

What benefit did India get?

Interest rates are high in India whereas low in western countries, hence borrowing money from abroad at less than 7 per cent rate was cheaper than domestic loan. Moreover, when foreign investors invest in the rupee, the international credibility of the rupee increases and the country’s infrastructure gets funded.

What is the shortage?

The biggest threat to the foreign investor is the weakness of the rupee. For example, an American investor bought Masala Bond in 2016 when 1 dollar was worth Rs 67. When he got the money back in 2019, 1 dollar had become 70 rupees i.e. the rupee became weak. In such a situation, he got full interest in rupees but when he converted it back into dollars, he got less dollars in his hand. This is the biggest risk.

Talking about interest, initially HDFC had given 7.875 percent annual interest in 2016, which was much higher than America and Europe at that time because the interest rate there was around 1 to 2 percent. For this reason, foreign investors were attracted towards these bonds but later RBI gradually reduced the maximum limit of interest on these bonds. When the interest reduced and on top of that there was a fear of rupee falling, this deal was not as profitable for foreign investors as before.