Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development – Agriculture.
6) What are Masala bonds? How do they work? Discuss the rationale behind them along with the pros and cons associated.(250 words)
Why this question:
The state of Kerala became the first Indian state to tap into the market for masala bonds on Friday. Thus, it is important for us from exam point of view to ascertain into the concept of Masala Bonds.
Key demand of the question:
The answer must discuss in detail the concept of Masala bonds, pros and cons associated with their utility.
Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.
Structure of the answer
write a few introductory lines by stating the background of the question.
Answers must discuss the following aspects :
- What do you understand by Masala Bonds? – “Masala Bonds” are the 10 year off-shore rupee bonds issued by International Finance Corporation (IFC), a member of the World Bank group, in the international capital market in 2014, to raise funds for supporting private sector infrastructure development initiatives in India. Masala bonds are listed in London Stock Exchange. 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.
- Discuss their rationale – like any other off-shore bonds, 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 offshore locations.
- Pros and cons associated – 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.
Conclude by reasserting their importance in raising capital.