Masala Bonds

Masala bonds, which are unique financial instruments denominated in Indian Rupees and issued by Indian entities outside of India, offer higher interest rates for investors and mitigate currency risk for borrowers. They contribute to strengthening foreign investments in the Indian economy and provide opportunities for portfolio diversification.

Masala bonds will be helpful for UPSC IAS Exam preparation. GS Paper-3 Indian Economy.

Table of Content

• What is Masala bond?
• Characteristics Of Masala Bonds
• Maturity Of Masala Bonds
• Benefits Of Masala Bonds
• Limitations of Masala Bonds
• Conclusion
• Frequently Asked Questions (FAQs)

What is Masala bond?

• Meaning: Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency.
• These are the bonds by which rupee-denominated loans are borrowed from overseas markets.

Examples

• The masala bond was first issued by the World Bank-backed International Finance Corporation (IFC) in November 2014.
• First Masala Bond in India: The Kerala Infrastructure Investment Fund Board (KIIFB) was the first Indian agency by debuting Masala bonds in 2019.
  • Masala bonds issued by KIIFB aimed to access the overseas debt market (London Stock Exchange).

Characteristics Of Masala Bonds

• Masala Bonds are issued by Indian entities.
• These bonds are issued outside India.
• These bonds are debt instruments that help to raise money in local currency from foreign investors.
• Both government and private entities can issue these bonds.
• Any resident of that country can subscribe to these bonds which are members of the Financial Action Task Force.
• Investors outside India who want to invest in assets in India can subscribe to these bonds.

Maturity Of Masala Bonds

• The minimum maturity period for Masala Bonds raised to the Rupee equivalent of USD 50 million in a financial year should be 3 years, and for bonds raised above USD 50 million equivalent in INR per financial year should be 5 years.
• The conversion for such bonds will happen at the market rate on the date of settlement of transactions undertaken for the issue and servicing of the bonds, including its redemption.

Benefits Of Masala Bonds

For investors:

• It offers higher interest rates.
• It helps in building up foreign investors’ confidence in the Indian economy.
• It helps strengthen foreign investments in the country as it facilitates foreign investors’ confidence in Indian currency.

For borrower:

• There is no currency risk because the rupee’s depreciation is not a concern.
• Borrowers need not worry about rupee depreciation as the issuance of these bonds is in Indian currency rather than foreign currency.
• Borrower can mobilize a huge amount of funds.
• It helps the Indian entity issuing these bonds to diversify its portfolio.
• These bonds help borrowers to tap a large number of investors.

Limitations of Masala Bonds

• According to RBI, the funds acquired through these bonds may only be utilized to create integrated townships or projects for affordable housing.
• It cannot be used for anything other than what was initially indicated, including investing in capital markets, buying land, and lending to other businesses for real estate-related purposes.
• Investor interest in Masala Bonds has decreased as a result of RBI’s periodic rate reduction.

Conclusion

Masala bonds work as valuable financial instrument for Indian entities seeking to raise funds in Indian Rupees from foreign investors. Masala bonds provide the advantage of higher interest rates and bolster foreign investors’ confidence in the Indian economy, while their limitations restrict the usage of funds for specific purposes such as affordable housing.

Ref: Source-1

FAQs (Frequently Asked Questions)