Masala bonds: What are they, how government plans to check rupee fall through them

Masala bonds: What are they, how government plans to check rupee fall through them

News

1. Government removed the cap of 5% of withholding tax (Tax on income imposed at source, i.e. a third party is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the government) from masala bond from financial year 2019

Important facts

2. Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency.
3. Importance of masala bond

• Masala bonds help to internationalize the Indian rupee and also strengthen the Indian financial system.
• By issuing bonds in rupees, an Indian entity is shielded against the risk of currency fluctuation, typically associated with borrowing in foreign currency.
• The bonds are directly pegged to the Indian currency. So, investors (foreign investor who buys the bond) will directly take the currency risk or exchange rate risks. If the value of Indian currency falls, the foreign investor will have to bear the losses, not the issuer which is an Indian entity or a corporate.
• Besides helping diversify funding sources, the cost of borrowing could also turn out to be lower than domestic markets.

4. Objective of the move

• The move will make masala bond more attractive to foreign investor.
• Inflow of credit from masala bond will help to check slide of rupee.
• It will also help in reducing current account deficit.