Limitations of Masala Bonds
- According to RBI regulations, the funds acquired through these bonds may only be utilized to create integrated townships or projects for affordable housing.
- In addition, it cannot be used for anything other than what was initially indicated, including investing in capital markets, buying land, and lending to other businesses for real estate-related purposes. The main goal of masala bonds might be compromised by these limitations.
- Investor interest in Masala Bonds has decreased as a result of RBI’s periodic rate reduction.
- The instrument’s usefulness has also been diminished by the prospect of rising taxes.
- Since the sustainability of financing through Masala Bonds is problematic, investors should exercise caution when taking on currency risks from emerging nations.
Similar to Masala Bonds are two other bonds issued in foreign currencies:
China’s Dim Sum Bonds ( a Chinese renminbi-denominated bond issued by a Chinese entity in Hong Kong), named after a popular dish in Hong Kong
Japan’s Samurai Bonds (a Japanese yen-denominated bond issued by a non-Japanese entity in the Japanese market) are named after the country’s warrior class.
Masala Bonds: Benefits, Features & Significance
Masala Bonds are debt instruments that are used to attract capital from international investors in the form of local currency. These are issued outside of India by an Indian entity as rupee-denominated bonds. These Bonds’ main purpose is to finance infrastructure projects, spur domestic growth through borrowing, and internationalize the Indian rupee. Given that the word “Masala” in Hindi refers to spices, the intention behind these was to promote Indian culture on a global scale. International Finance Corporation (IFC) issued the first Masala bond for Indian infrastructure projects in 2014. Also, Kerala became the first Indian state to issue Masala Bonds for Rs. 2,150 crores on the London Stock Exchange in 2019.