Rupee denominated debt, Masala Bond

 Rupee Denominated Debt:

• External debt of India that is denominated in India’s domestic currency, the Rupee. 
• The contractual liability is settled in foreign currency.
• These bonds are beneficial for the borrower in the sense that exchange rate variation risk is  borne by the creditor and not by the borrower. 
• So, the borrower always pays back the foreign currency equivalent of the rupee denomination valued at the spot exchange rate prevailing at that point in time. 

At the time of borrowing:

Creditor (Dollar)-------------------converted to INR------------------- Borrower 

At the Time of giving back:

Borrower (INR)-------------------converted to Dollar------------------- Creditor

In India rupee denominated debt comprises: 

• Rupee denominated NRE account
• Non-Resident Ordinary Rupee (NRO) account,
• Foreign Institutional Investors (FII) investment in Government Treasury-Bills
• Dated and FII investment in corporate debt securities .
• Masala bond 

Masala Bond:

Masala bonds, are first Rupee denominated off-shore bonds, used by Indian entities to  borrowings from overseas markets .

Features :

• These bonds are issued to foreign investors in rupee denominations and settled in US dollars
• Those foreign investors who want to take exposure of the Indian market invest in these bonds. 
• Being Rupee denominated, the currency risk lies with the investor and not the issuer, unlike money  raised in foreign currency loans.    
• It benefits the Indian borrower from currency fluctuation as there is no risk of loss due to rupee depreciation as the issuance of these bonds is in Indian currency rather than foreign currency.