Rupee Denominated Bond is commonly known as Masala Bonds. This bond was first introduced in the year 2014 in India by IFC that is, International Finance Corporation. It was issued for funding various infrastructure projects by the IFC. Masala Bonds are used outside of India to raise money. It should be noted that it is in Indian currency therefore when the rate of the rupee falls, the investor will have to bear the loss.
When it comes to financing, a bond denotes a loan. Here is what you should know – the one who issues the bond is called the borrower or the debtor and the one who owns the bond is called the creditor or the lender. Also, the coupon is the interest while either the debtor or the creditor has access to external funds for long-term investments.
In short, any investor who wants to invest in the assets of India should use these bonds. These investor’s securities market regulator should be a member of the International Organisation of Securities Commission.
Characteristics Of Masala Bonds
It is crucial to first understand the features of the bond and the various terminologies related to it like – bond yield, coupon amount, maturity amount, credit quality and market price.
- For these bonds, the investor can belong to a country that has a membership of the Financial Action Task Force or the security market regulator must be from the International Organisation of Securities Commission.
- Investors can be from outside India and can invest in Indian assets.
- Like every bond, this has a principal amount also known as the face, par or nominal amount. It is this amount in which the issuer pays the interest.
- The maturity date refers to when the issuer pays the total amount of money. The tenure is the length of time between the agreement day to the maturity date.
- A coupon is the interest rate that is paid by the issuer to the holder.
- The market price of this bond depends on the currency, amount, and timing of the interest payments.
Benefits Of Masala Bonds
The best thing about Masala Bonds is that both the borrower and investor get to earn benefits. Here are some of the benefits they both can get –
Advantages for the investors are:
- Investors benefit from it because of the high interest it provides.
- Foreign investors can believe better in the Indian economy because of the Masala Bonds.
- The capital gains that are received from the rupee denomination are not included in the tax.
- If the rupee appreciates at the time of maturity, it benefits the investor.
Advantages for the borrowers are:
- Since there is no currency risk in this bond, the borrower can rest assured of currency fluctuations.
- The insurance of the Rupee Denominated Bonds is in Indian currency making it easier for the borrowers.
- These bonds give an option of moving huge amounts of funds easily.
- When these bonds are issued outside India, the rate is 7% interest. This way the borrowers can cut down on their costs.
- Borrowers can get a huge number of investors since they are issued in the offshore market.
Limitations of Masala Bond
- Reserve Bank of India has taken steps that limit the benefit of Masala Bonds. There have been rate cuts at particular times which makes the Rupee Denominated Bonds not that impressive to the investors.
- The money that is collected from Masala Bonds can be used only in fixed places which is another reason for not being that appealing.
- Another challenge is that financing through Masala Bonds is unsustainable. Thus, investors should be alert when enduring currency risks from markets that are emerging.
So now it is clear that Indian entities have the freedom to issue masala bonds outside of India. The private entities and the government can try issuing these bonds. These bonds are debt instruments that help in raising money in local currency.
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