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Wednesday, December 9, 2015

Rupee Denominated Bonds or Masala Bonds

Rupee Bonds or Masala Bonds have been in news of late and what is in news is bound to be important for General studies paper of IAS UPSC Civil Services Examination. So here is some point-wise information that would be useful for understanding what are rupee bonds and what is their significance.

What are Rupee Denominated Bonds?
- Bonds are basically instruments of debt through which companies raise funds from investors
- Indian companies have been borrowing money from overseas markets but these are generally denominated in dollars or other foreign currencies such as Euro
- Offshore rupee bonds will allow Indian companies to hedge currency fluctuation risks - for example a company's cost may rise sharply if for instance the rupee's value had weakened sharply during payback time compared to its value at the time of issuing the bonds
- A rupee denominated bond would negate such currency risks for Indian companies plus interest rates are lower by ~2% points which would help companies cut costs

Why Rupee Bonds are also called Masala Bonds?
-  International Finance Corporation (IFC) which is investment arm of World Bank issued a Rs.1000 crore bond in November 2014 to fund infrastructure projects in India and named them 'Masala Bonds' to reflect the Indian connection (yuan denominated bonds are called 'dim sum' bonds)
- Indian Railways will issue rupee denominated bonds and list them on London Stock Exchange

Benefits of Masala Bonds
- offers opportunity to foreign investors who are not registered in India to take exposure to Indian debt
- it will diversify the investor base for Indian corporations
- its success will internationalize Indian currency
- currency risk is borne by the investors and help Indian companies to hedge currency fluctuation risks
- Indian banks reluctant to lend to sectors facing weak demand and under heavy debt 
- global rupee bonds will be used to refinance costly loans or raise capital for new projects with little currency risk

Risk Factors
- Rupee bonds can influence local interest rates and domestic currency
- Attractiveness of these rupee denominated bonds to the overseas investor

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