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Masala bonds: An interesting flavor to India's growth story 
(Thu, 20 Nov Pre-Open) 
 
Indian stock markets have witnessed a strong run since Modi came to power. One of the themes driving this rally is the infrastructure growth. While stock markets are already reflecting the optimism even as the actual growth is yet to happen, it is the bond markets that will boost investment in infrastructure.

A big push in this regard has come from the global bond markets. For the first time, rupee denominated 10 year debt securities worth Rs 10 bn (US$ 162 m); dubbed 'Masala bond' will be listed in London. International Finance Corporation - World Bank's investment arm will use the proceeds from these bonds to buy notes issued in India this year by the government to fund infrastructure projects. This will be done by buying long term infrastructure bonds issued by Axis Bank Ltd.

This seems to be a win win propostion for the stakeholders. It gives global money managers a chance to participate in the India's growth while earning a yield of 6.3%. To give you a perspective, this is 4%higher than 2.3% yield on US treasuries. For India, it's a way to attract more money to fund infrastructure and affordable housing projects. It is noteworthy that these bonds are rated AAA. As such, they rank lower on risk aspect as compared to nation's BBB- rating. The move is well timed and is likely to capture investors' interest as rupee seems to be back in favor after recovering from the lows seen last year.

However, it is a just a small step taken keeping in mind the amount of work that needs to be done. The amount thus secured contributes to just 0.6% of what Mr. Modi plans to invest in India's power and transport sector - the lifeline of Indian economy that desperately needs infrastructure overhaul. Nonetheless, Masala bonds do add a positive flavor to India's growth story. If these bonds find enough liquidity, it will be further boost demand of similar products in global capital markets.

After coming to power, Modi Government has delivered on some long pending policies. This suggests that the Government intends to walk the talk when it comes to reforms and economic growth. The optimism has rubbed on global investors as well who seem to buying India turnaround story. However, the Government will need to keep the reform momentum going to realize the targets set for itself. Otherwise, it won't take long for global money to lose confidence and interest and look for better opportunities elsewhere.

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