Current Affairs | ARTICLE - MASALA BONDS

                                                   

Masala bonds are the 10 year offshore rupee denominated borrowings by Indian entities in overseas market. The IFC (International Finance Corporation) , an investment arm of the World Bank, last November issued a 1000 rp. crore bond to fund infrastructural projects in India.

These bonds were listed on the London Stock Exchange (LSE). IFC then named them Masala Bonds to give a local flavour by calling to mind Indian culture and cuisine. 

Why such an Odd name ??

                

While it may seem odd to name a staid debt instrument after food stuffs, it has been done in the past. Chinese bonds, named Dim-sum bonds after a popular dish in Hong Kong, have been around for while. 

Importance of Masala Bonds ??

Masala bonds, if they take off, can be quite a significant plus for the Indian economy. They are issued to foreign investors and settled in US dollars. Hence the currency risk lies with the investor and not the issuer, unlike external commercial borrowings (ECBs), where Indian companies raise money in foreign currency loans. 

Advantages and Disadvantages of Masala Bonds ??

Let us consider the advantages first:

-->>Competition from overseas markets may nudge the government and regulators to hasten the development of our domestic bond markets. A vibrant bond market can open up new avenues for bond investments by retail savers. 

-->>If Masala bonds are eagerly lapped up by overseas investors, this can help prop up the rupee. 

-->>The rising demand for Dim-sum bonds in 2011, for instance, promoted the use of the yuan in global trade and investment. Dim-sum bonds also provided investment avenues for yuan-holders outside of China. With talks of a full rupee convertibility back home, Masala bonds can help the rupee go global.

Now, let us discuss the disadvantages also:

-->>But these bonds can have bad after-effects too if companies decide to binge (over dependence) on them. Some reports estimate that Indian corporates, are likely to issue about $6 billion worth of Masala bonds this fiscal. With our economy still on shaky ground, too much reliance on external debt (even in rupees) can weigh heavily on our rating by global agencies.

CONCLUSION:

Masala bonds are a good idea to shield corporate balance sheets from exchange rate risks. But they are best used in moderation. The after-effects of too much masala are not pleasant.

Thanks...!!

Reference: The Hindu