UPSC Prelims 2016 Q8: Indian Economy – Financial Markets & Capital Markets
With reference to 'IFC Masala Bonds', sometimes seen in the news, which of the statements
given below is/are correct?
1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
2. They are the rupee - denominated bonds and are a source of debt financing for the public and
private sector.
Select the correct answer
using the code given below.
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (c) Both 1 and 2
Explanation
IFC Masala Bonds
Masala bonds are rupee-denominated bonds issued outside India.
The International Finance Corporation (IFC) issued the first ones in November 2014.
| Statement | Verdict | Fact |
|---|---|---|
| 1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank | Correct | IFC is the private sector arm of the World Bank Group |
| 2. They are rupee-denominated bonds and are a source of debt financing for the public and private sector | Correct | Money raised funds infrastructure in India |
Why they matter:
| Feature | Masala bond | Ordinary foreign currency loan |
|---|---|---|
| Currency | Rupee | Dollar or other foreign currency |
| Exchange rate risk borne by | Investor | Borrower |
| Listed at | Overseas exchanges such as London | Overseas |
Answer: (c) Both 1 and 2.
Why each option is right or wrong
- (a) Incorrect. Statement 2 is also true: they are rupee-denominated debt instruments.
- (b) Incorrect. Statement 1 is also true: IFC is an arm of the World Bank Group.
- (c) CORRECT. IFC is a World Bank arm, and masala bonds are rupee-denominated bonds.
- (d) Incorrect. Both statements about IFC Masala Bonds are true.
Key point
Masala bonds: rupee-denominated bonds issued abroad; first by IFC (World Bank Group) in 2014; currency risk lies with the investor.
Remember
Masala bond = rupee bond sold abroad; risk on investor.
Common mistakes
- Thinking masala bonds are issued in dollars; they are in rupees.
- Placing the currency risk on the Indian borrower; the investor bears it.
- Confusing IFC with the IMF or with the IBRD.
Exam tip
Named after local flavour: masala (rupee), dim sum (yuan), samurai (yen).
Sources
- International Finance Corporation — Masala Bond programme
- Reserve Bank of India — Issuance of Rupee denominated bonds overseas (29 September 2015)