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Masala Bonds: A Resurrection of the Indian GDP

Courtesy/By: Tarun K.S. | 2019-12-06 10:43

 

India’s Gross Domestic Product (GDP) has continued to take a downward spiral while we enter into the third quarter (October-December) of the year 2019-20. The GDP growth which was recorded to be 4.5% by the Ministry of Statistics and Program Implementation, is the lowest and slowest the country has seen in almost more than six years. Six out of the eight core industries which are the foundation of the Indian economy have been majorly hit, with the coal industry suffering a catastrophic decline of 17.6%. When the economy is in itself in such a dilemma, how do you revive from such stagnant growth?


The country as we know it has a mixed economy, a mixture of private and public sectors working side-by-side to boost the economy. At such a crossroad, we need one mixture to tackle another one. Say hello to Masala Bonds. The term ‘Masala bond’ was coined by the International Finance Corporation (IFC), a branch of the World Bank that offers investment advice to different countries. This nomenclature was used as it evokes not only the culture, but also the cuisine of India. Masala bonds are essentially bonds that are issued by foreign markets but are denominated in Indian rupees instead of the local foreign currency. In this way the foreign investors will directly take the currency risk or exchange rate risks and not the Indian issuer of bonds. If the value of the Rupee falls, the foreign investor will bear the loss and not the Indian entity. Therefore, protecting the Indian market and thereby boosting the internal economy by encouraging investments. Similar bonds exist in other countries too, such as Dim sum bond (China), Samurai bond (Japan) and Eurobond (EU). Masala bonds have a minimum maturity of five years and there is a cap of $750 million per year for borrowers which can be extended by the Reserve Bank of India’s (RBI) approval.


The benefits of such a bond is that the cost of borrowing money turns out to be lower than that of the domestic markets and it diversifies the funding into the country. Earlier this year, the state of Kerala raised Rs. 2,150 crores through masala bonds for its mighty funding of critical infrastructure projects. HDFC bank, India’s largest finance company has also raised Rs. 3,000 crores by the issuance of Masala bonds. This was advocated by Nikhil Rathi, CEO of London Stock Exchange when he said, “The success of this issuance shows the support of global markets for high-quality Indian companies.” To add on to this, masala bonds have also been currently listed on the London Stock Exchange.


Masala bonds in the light at the end of the dark tunnel for the Indian rupee. Since its inception, the Indian government in September 2018 divulged a tax break for non-resident buyers of Masala bonds as part of its measure to boost the valuation of the Indian rupee. This tax break was followed by a 5.2% gain in the rupee against the dollar since the end of September. Nevertheless, this exemption expired at the end of March 2019. Therefore, by using this offshore tactic, the Indian economy is beneficial as it does not depend on the fluctuation rate of the forex, thereby safeguarding all the Indian entities and safely securing the Indian economy. The solution in hand right now for India to increase its GDP growth in the third and fourth quarters, is by encouraging such masala bonds by ways of exempting taxes as the government did in September 2018.

 

Courtesy/By: Tarun K.S. | 2019-12-06 10:43