The Indian government has been keen to push out Masala bonds in a bid to internationalise the rupee. Housing Development Finance Corp (HDFC) has been one of the strongest candidates to kick off the market, having hired banks and tested investor appetite in Hong Kong, Singapore and London in late November.
The company previously told GlobalCapital Asia that its Masala bond would come as early as the first week of December, but so far it’s been missing in action.
Bankers on the deal blame the delay on general market conditions in December when liquidity dries up, saying that interest from investors was favourable during the roadshow. But the deferral of the first such deal may actually be a positive.
For starters, there’s a big discrepancy between where investors and issuers see fair value with numbers all over the place. Some investment bankers speculate that the difference between what companies are willing to pay up and what investors expect is around 200bp, while others reckon the figure is narrower at around 20bp-30bp.
The difference could be even more, say others, especially when taking into consideration the growing policy divergence between a hawkish Federal Reserve and the Reserve Bank of India, which is easing its monetary policy.
Secondly, the recent currency fluctuation doesn’t help. The rupee, which has fallen 5.8% against the dollar this year, dropped to a two year low of Rp67.09 on December 14 ahead of the Federal Reserve’s meeting this week.
While the rupee has fared better when compared with other emerging market currencies such as the Malaysian ringgit and Indonesian rupiah, the fall nevertheless doesn’t bode well for Masala bond issuance now. Stability in the currency is an essential prerequisite before the first transaction so that investors don’t quickly lose their appetite if the rupee depreciates further.
There’s also a lack of clarity over withholding tax to be imposed on Masala bond investors. According to current rules, 5% of the coupon would be applied as withholding tax. But sources say the authorities are rumoured to be considering slashing the tax rate entirely, albeit temporarily, in a bid to entice buyers into the first slew of issuance.
With such uncertainty about tax, it makes sense for issuers to hold off until there is clarity on how much investors will actually be charged for buying Masala debt.
International names such as the European Bank for Reconstruction and Development, German development bank KfW and the International Finance Corp have sold Masala bonds in the past. But HDFC's deal would be the first from an Indian issuer. Its trade will definitely materialise, with one source at the company saying January is now expected to be a possible window. And once it sells its notes, there will likely be others following in its wake.
But with participants appearing to need more time to fully digest the pros and cons of such issuance, a slow and steady approach is positive for an asset class that could spice up the Asian debt market.