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Things you should know about 'Masala Bonds' 5


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What are Masala Bonds? Masala bonds are Indian rupee denominated bonds issued in offshore capital markets. These will be offered and settled in US dollars to raise Indian rupees from international investors for infrastructure development in India. IFC will convert bond proceeds from dollars into rupees and use the rupees to finance private sector investment in India. IFC has named these ‘Masala’ bonds as ‘masala’ is a globally recognized term that evokes the culture and cuisine of India. This is not the first time that a bond has been named after the food or culture of a country. Chinese bonds, for example, are called Dim sum bonds, and Japanese ones as Samurai bonds. #1


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Why is it important? Masala bonds 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. While ECBs help companies take advantage of the lower interest rates in international markets, the cost of hedging the currency risk can be significant. If unhedged, adverse exchange rate movements can come back to bite the borrower. But in the case of Masala bonds, the cost of borrowing can work out much lower. #2


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What has been the regulator's stance on this? The Reserve Bank of India has issued guidelines allowing Indian companies, non-banking finance companies (HDFC, India Bulls Housing Finance are examples of such companies) and infrastructure investment trusts and real investment trusts (investment vehicles that pool money from various investors and invest in infrastructure and real estate sectors) to issue rupee-denominated bond overseas. The rules put the issue limit to $750 million and also has a pricing cap for various tenures of issue. Experts say the move to permit masala bonds is an attempt to increase the international status of rupee and is also a step toward full currency convertibility (the freedom to convert Indian currency into other internationally accepted currency without any restrictions). #3


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What do masala bonds mean to the issuer? An important consideration for issuers is the access to cheaper funding than what's available in the domestic markets, according to ratings firm S&P. For corporates, who would be the main issuers, masala bonds will be one other key source of funding apart from banks and local debt markets. Another ratings firm India Ratings and Research says such bonds would lower the cost of capital over a period of time - the cost remains one of the highest in Asia. #4


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Why should investors look at masala bonds? The Finance Ministry has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds to 5 per cent from 20 per cent, making it attractive for investors. Also, capital gains from rupee appreciation are exempted from tax. Globally, there is ample liquidity thanks to lower interest rates in developed markets, but there are very few investment options due to weak economic conditions globally. India is that rare fast-growing large economy, and masala bonds is one way for investors to take advantage of this. #5


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