Masala Bonds

This work reveals about masala bonds and their significance in the capital market. Its importance in the economy, issuing process and other characteristics are revealed. This bond is issued outside India and investors outside India are willing to invest in these bonds. India’s most standard level examination UPSC often sets questions regarding this topic and in 2016 it asked about this topic. Through this work benefits and shortcomings of Masala bonds will be highlighted. 

Masala bonds

This bond is a “rupee-denominated bond” that is issued by Indian entities or corporate outside India. Kerala is the first state to issue Masala Bonds for “London Stock Exchange” with a value worth Rs 2150 crores.  This is a kind of debt instrument for raising the value of money in terms of foreign currency and is issued by Indian entities to foreign investors. Through this, a channel of global investment has been facilitated. This bond was first introduced in the year of 2014 by International Finance Corporation. This bond has been named so because masala means spices and spices is India’s culture.  To simulate Indian culture on a global platform this bond has been named so. HDFC, NTPC are financial entities that deal with Masala bonds trading. 

Through these bonds, Indian money is raised by Indian corporations from foreign investors. The benefits of Masala Bonds are that they are issued below 7% interest rates and hence cost of funds become cheaper for borrowing parties. Regional financial institutions established in foreign countries can also issue Masala Bonds if India is a member country of that financial institution. Portfolio diversification, development of the local bond market is ensured by issuance of this bond. This bond is basically used in offshore capital markets. 

Masala Bonds in Economics

The Indian economy has been significantly benefited through Masala Bonds. Economics is a subject that deals with production, consumption and distribution of every goods and service produced in an economy. It looks after financial, social and different business entities that work in a country. India’s capital market consists of various bonds, debentures and other instruments to ensure a market for “long term loanable funds”. Through this bond capital market tries to increase funding for infrastructure projects, accelerate internal growth through borrowings and make Indian currency internationalise. This bond is peculiar because all the forms like repayment, buying etc are expressed through Indian currency. 

Masala Bonds UPSC

This is an important question in the UPSC syllabus. In the subject of Economics and current affairs, this topic is significant and UPSC sets questions on this topic. In every alternative year UPSC questions about either of its characteristics, trading process and its advantages and shortcomings. It asks in the framework of either an MCQ question in the prelims section or a long answer question in the main examination.

What is Masala Bonds

Masala bonds are helpful for rescuing the value of the sliding rupee. This bond is directly connected to Indian currency. Issuing process involves buying bonds, payment, repayment, borrowing and all these processes are encashed through rupee. This is pegged to the Indian rupee directly and hence investors of Indian entities can bear losses if Indian currency devalues. Thus foreign investors are interested to invest in this bond that can bring money into the Indian economy and could support rupee evaluation. However, this bond is subjected to rate cuts by the RBI frequently which can demotivate investors. This bond has facility to use for loan refinancing and non-convertible debentures. This bond follows a maturity period and minimum of 3 years and 5 years of maturity period for bonds raised up to and above 50 million dollars respectively. Masala bonds ease the process of making Indian rupee familiar on international platforms. Another advantage of these bonds is that investors do not get affected if rupee devaluation occurs.  Concept of Masala bonds came due to the severe current account deficit that the Indian economy faced during 2008 and 2009 for spurring capital flights. 

Conclusion

This work has emphasised on the importance and characteristics of Masala bonds. Its naming style, benefits and limitations have also been mentioned in this work. Some FAQs have been given in this work to give a better understanding. Its trading pattern, importance in UPSC examination and Indian economy has been highlighted. Its maturity period, investment style has been mentioned in this work.