Masala Bond

WHY IN NEWS?

Asian Development Bank (ADB) has listed its 10-year masala bonds worth ?850 crore on the global debt listing platform of India INX.

ABOUT MASALA BONDS

• Masala Bonds are rupee-denominated borrowings issued by Indian entities in overseas markets.
• Masala means spices and the term was used by International Finance Corporation (IFC) to popularise the culture and cuisine of India on foreign platforms.
• The objective of Masala Bonds is to fund infrastructure projects in India, fuel internal growth via borrowings and internationalise the Indian currency.
• The bonds are directly pegged to the Indian currency.
• So, investors will directly take the currency risk or exchange rate risks.
• If the value of Indian currency falls, the foreign investor will have to bear the losses, not the issuer which is an Indian entity or a corporate. If foreign investors eagerly invest in Masala Bonds or bring money into India, this would help in supporting the rupee.
• The issuer of these bonds is shielded against the risk of currency fluctuation, typically associated with borrowing in foreign currency.
• Besides helping in diversifying funding sources, the costs of borrowing via masala bonds could also turn out to be lower than domestic markets.

Prelims Question

Q. With reference to Masala bonds, which of the following statements is/are correct?
1. They are rupee-denominated borrowings issued by Indian entities in overseas markets
2. The investors will directly take the currency risk or exchange rate risks
Select the correct answer using the code given below:
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 nor 2

Answer to the Prelims Question