Masala bonds: Aiming to arrest the slide of rupee and reduce current account deficit (CAD), the government on Friday announced certain measures including removal of a few restrictions on ‘masala bonds.’ The government plans exemption from withholding tax for issuance of masala bond issues and removing restrictions on Indian banks’ market making in masala bonds. Here we would understand what exactly are masala bonds:
Masala bonds are the bond which are issued by the Indian firms (in rupee denomination) to foreign investors with an aim to attract funds for projects. The Indian firms have since long availed loans in international credit markets in different foreign currencies. However, a risk is always attached with such borrowings including risk of having to pay more while repaying its debt, or while servicing the interest on such borrowings if the rupee weakened.
The demand for masala bonds from offshore investors is generally driven by the stability of the rupee. In an environment where the rupee is under pressure, the foreign investor are unlikely to increase portfolio of rupee-denominated assets.
When masala bonds are issued in the foreign markets, the risk gets transferred to the investors who subscribe to them, taking into account the growth prospects of the country and the issuing company as well as the strength of the rupee. From the issuer’s perspective, it means cheaper borrowings compared to raising funds in India besides diversifying its sources of fund-raising.
The International Finance Corporation, the private arm of the World Bank, for the first time in 2013 issued successive tranches of such bonds. Post 2016, companies such as HDFC, NHAI, REC, IIFCL and NTPC issued ‘masala bonds.’
The capital raised by the companies through these masala bonds flows back into the country, helping boost the currency.