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Debt Instruments - II

CS M Pota 
on 19 October 2016

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First of all thank you very much to all the readers who has shown interest in my Article 'Debt Instrument'. Here I add one more type of Bonds which have very recently entered into the Indian Finance market. 

Masala Bonds

Masala bonds are the Bonds, like any other off-shore bonds which are issued to foreign investors, are intended for those foreign investors who want to take exposure to Indian assets, yet constrained from doing it directly in the Indian market or prefer to do so from their off-shore locations. The settlement of the bonds will be in US dollars since they are attached to the Indian currency i.e. rupee, investors will directly take the currency risk or exchange rate risks. Due to limited convertibility of Rupee the settlement of the Bonds is done in US dollars.

The term "Masala" stands for Indian spices, which gives Indian cuisine its characteristic flavour, and helped India gain a place in the global trade map.

The term Masala bonds now extends to any rupee denominated bonds issued to overseas buyers even though RBI has not resorted to the use of this name in their guidelines.

By usage of the term, Masala Bonds are similar to dimsum bonds -bonds issued outside China but denominated in Chinese currency. But they are different from samurai bonds which are Yen (Japanese currency)-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.

Masala bonds are the first  rupee bonds listed on the London Stock Exchange. They are the longest-dated bonds in the off-shore rupee markets, building on earlier off-shore rupee issuances by IFC at three-, five-, and seven-year maturities. However, these earlier bond issuances were not issued under the nomenclature of masala bonds. Further, as on date, the present issue of masala bonds is a one-time issue. Hence, subsequent  issuances of the off shore rupee bonds may or  may also not be under this name as ‘Masala Bonds’.

Advantages and Disadvantages

Offshore bonds have its own set of advantages and disadvantages for both the issuer and the investor as well as for the economy. Competition from offshore markets may induce improvements in domestic bonds markets such as strengthening of domestic market infrastructure, improving investor protection and removing tax distortions that hinder domestic market development etc. Against these benefits come the risks associated with financial openness and sudden shifts in capital flows, and the risk that offshore markets may draw liquidity away from the domestic market.


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