If the view is that rupee will depreciate, hedge your exposure by using forward cover
Non-resident Indian (NRI) investors trying to earn higher interest on their investments can look at masala bonds, which are rupee-denominated bonds issued abroad. HDFC and NTPC are the two companies that have issued masala bonds so far. Foreign individual investors, including NRIs, can invest in these bonds after listing.
While the first two issues were open only for institutional investors, investment experts say that around 25 per cent of investors were private banks, which in turn sold them to their high net worth clients. Shashikant Rathi, executive vice-president and head of treasury and markets at Axis Bank, says many individual investors bought these bonds after they were listed on the exchanges.
“Many individual investors took leverage from their banks which makes it an attractive option,” he says.
The coupon on HDFC’s bond at the time of issuance was 8.33 per cent and it listed at 7.6-7.75 per cent, which means it listed at a premium due to the rise in bond prices. The coupon on NTPC’s bond was 7.48 per cent at the time of issuance.
Both HDFC and NTPC bonds are listed on the London Stock Exchange. In addition, NTPC’s bonds are listed on the Singapore Stock Exchange as well. The tenure of the bonds is three to five years.
Investors looking for the opportunity to leverage can get rates at lower than two per cent in dollar terms, but they must add the rupee cost and take a hedge against that, Rathi adds.
According to Ajay Manglunia, executive vice-president (fixed income) at Edelweiss Finance, investing in masala bonds makes sense for NRI investors because the yields are much higher than what they get in foreign markets. And, the leverage will enhance the yield, because Libor rates are low.
While there is risk, investors can hedge this by taking forward cover. “The yields on the bonds are close to eight per cent, which is very attractive. Even if you account for a normal four-five per cent depreciation in the rupee over three-to-five years' tenure of the bond, it is a good option because Libor and overseas sovereign bonds rates are less than two per cent,” he says.
Investors must look at the company issuing the bond and evaluate the currency risk they can afford to take, says Prateek Pant, co-founder and head of products and solutions at Sanctum Wealth Management.
“If the investor has an end-use in rupee, that is, if they have other assets or family in India for which they need money in the domestic currency, then it makes sense to invest in such bonds. These are investors who already invest in NRE (non-resident external) deposits in India. Compared to bank deposits, the coupon on these bonds is higher,” he adds.
The outlook on the rupee is that it is likely to remain stable because of favourable domestic factors. Some global factors to watch out for include outflows on account of FCNR (foreign currency non-resident) outflows, which could give rise to short-term volatility and an increase in interest rates by the US Federal Reserve. In the past year, the rupee depreciated by a little over one per cent against the dollar.
Masala bonds are a good option if they offer returns, in dollar terms, of 3-3.5 per cent because currently debt in the overseas market offers returns lower than this, says Feroze Azeez, deputy CEO, Anand Rathi Private Wealth.
“Investors must provide for four-five per cent depreciation in the rupee over the next five years. While the principle behind investing is the same as investing in NRE deposits, it will be easier for investors to liquidate bonds as they can be traded on the exchanges.”
