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Masala Bonds: Benefits, Features & Significance

Masala Bonds are debt instruments that are used to attract capital from international investors in the form of local currency. These are issued outside of India by an Indian entity as rupee-denominated bonds. These Bonds’ main purpose is to finance infrastructure projects, spur domestic growth through borrowing, and internationalize the Indian rupee. Given that the word “Masala” in Hindi refers to spices, the intention behind these was to promote Indian culture on a global scale. International Finance Corporation (IFC) issued the first Masala bond for Indian infrastructure projects in 2014. Also, Kerala became the first Indian state to issue Masala Bonds for Rs. 2,150 crores on the London Stock Exchange in 2019.

Features of Masala Bonds:

Characteristics of Masala Bonds:

Eligibility:

Masala Bonds can only be issued to the countries, and a resident of that country must subscribe to them: 



Maturity Period:

Benefits of Masala Bonds:

1. Benefits to Investors:

Masala bonds will offer diversification from the domestic bond market, which is relatively small. These bonds provide a means of investment for foreign investors that lack access to the domestic market via FII or FPI. Under this, Rupee appreciation-related capital gains are tax-free and less paperwork is required because there is no Foreign Portfolio Investment registration requirement. These bonds have interest rates that are up to 5% higher than the base rate set by the State Bank of India. Also, bond settlement in foreign currency is feasible through global custodians.

2. Benefits to Borrowers:

There is no currency risk because the rupee’s depreciation is not a concern for the companies issuing these bonds. It provides a more affordable cost of funds as they have interest rates below 7%. The money can be utilized to refinance rupee loans and non-convertible debt, and also as working capital for businesses. 



3. Benefits to India:

Interest rates are very low in currencies like the US dollar, pound sterling, euro, and yen. Therefore, it is advantageous for Indian enterprises to raise money by issuing Masala Bonds. As foreign investors get more familiar with the Indian rupee, the Indian economy, and its growth potential, the rupee becomes more globally competitive. Also, with a rise in the popularity of these bonds, there will be a decrease in external commercial borrowings (ECB) denominated in foreign currencies. As a result, the debt market will be in a favourable position with regard to currency risks. Also, competition from foreign investors will aid in the growth of domestic bond markets. This will therefore provide ordinary investors access to a new market.

Limitations of Masala Bonds:

Similar to Masala Bonds are two other bonds issued in foreign currencies:
China’s Dim Sum Bonds ( a Chinese renminbi-denominated bond issued by a Chinese entity in Hong Kong), named after a popular dish in Hong Kong
Japan’s Samurai Bonds (a Japanese yen-denominated bond issued by a non-Japanese entity in the Japanese market) are named after the country’s warrior class.

Conclusion:

Masala bonds may prove to be a practical solution for financing the maintenance of many development projects in India, such as creating smart cities and a digital India. They contribute to increasing investor trust, which may encourage foreign investment in India. However, relying too much on masala bonds can affect the sovereign rating and contribute to an external debt problem.

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