Masala Bond


  • Masala Bonds are rupee-denominated bonds issued by Indian entities in foreign markets. They allow Indian entities to raise funds in Indian currency from foreign investors, rather than in foreign currencies. Here are some key points about Masala Bonds:
  • Introduced in 2014: The International Finance Corporation (IFC) issued the first Masala Bonds to fund infrastructure projects in India.
  • Issued Outside India: These bonds are issued outside India but are denominated in Indian Rupees.
  • Investor’s Risk: If the value of the rupee falls, the investor bears the loss, not the issuer.
  • Usage of Proceeds: The funds raised can be used for various purposes like refinancing of loans, development of townships, and corporate working capital. However, there are restrictions on using these funds for certain activities like real estate or capital market investments.
  • Benefits: For investors, Masala Bonds offer higher interest rates and tax-exempt capital gains if the rupee appreciates. For issuers, it’s a way to access international markets without taking on currency risk.
  • These bonds have been used by various Indian entities to attract foreign investment and to support the growth and internationalization of the Indian Rupee.

Origin of Masala Bonds:

  • Masala Bonds are a type of financial instrument introduced by the International Finance Corporation (IFC) in 2014. The term “Masala” is a Hindi word meaning spices, chosen to evoke the culture and cuisine of India. These bonds are issued outside India but denominated in Indian Rupees, rather than the local currency.
  • The first Masala bond was issued by the IFC in November 2014, raising ₹10 billion to fund infrastructure projects in India. This move allowed the IFC to attract foreign investment into India while mitigating the currency risk for the borrower, as the investors bear the risk of currency fluctuations.
  • Following the IFC’s lead, HDFC became the first Indian company to issue Masala Bonds in July 2016, raising ₹30 billion. In the same year, NTPC issued the first corporate green Masala Bonds worth ₹20 billion. These bonds have since been used to fund various projects, including infrastructure development and climate change initiatives in India.

Tenure, Interest rates, and Listing of Masala Bond:

  • Masala Bonds are a type of financial instrument that allows Indian entities to raise funds from overseas markets in the local currency, the Indian Rupee. Here’s a brief overview of their tenure, interest rates, and listing:
  • Tenure: Masala Bonds have variable maturities, typically ranging from 3 to 20 years. This gives issuers and investors flexibility in terms of investment duration. According to RBI guidelines, the maturity period is three years for bonds raised up to the rupee equivalent of 50 million dollars in a financial year, and five years for bonds raised above that amount.
  • Interest Rates: The interest rates on Masala Bonds are often higher compared to those in the investor’s native country. This is to entice foreign investors and offset the currency risk associated with the bonds. The coupon rates must be no more than 300 basis points over the government curve for deals over $50 million.
  • Listing: Masala Bonds are typically listed on international stock exchanges, which allows a wider range of investors to purchase them. For example, they can be listed on exchanges like the London Stock Exchange.
  • These bonds are a way for Indian entities to diversify their funding sources and for investors to gain exposure to Indian assets while managing currency risk. They represent a significant development in the internationalization of the Indian Rupee.

Masala Bond

Benefits of Masala Bonds:

  • Rupee-Denominated: Issued outside India in Indian currency, which means the currency risk is borne by the investor.
  • Attractive Interest Rates: They offer higher interest rates compared to other instruments, benefiting the investor.
  • Investor Confidence: Helps in building foreign investors’ confidence in the Indian economy.
  • Diverse Investor Base: Attracts a wide range of investors, increasing liquidity.
  • Tax Exemption: Capital gains from rupee denomination are exempted from tax.
  • Currency Appreciation Benefit: If the rupee appreciates at the time of maturity, it benefits the investor.
  • Lower Borrowing Costs: Borrowers can obtain funds at lower interest rates compared to prevailing rates in India.
  • Refinancing: Can be used for refinancing rupee loans and non-convertible debentures.
  • Infrastructure Development: Proceeds can be used for infrastructure projects like townships and affordable housing.
  • Working Capital: Provides working capital to corporates.
  • These points highlight how Masala Bonds can be advantageous for both investors and borrowers, facilitating investment in India while managing currency risk effectively.

Limitations and Risks:

  • Masala bonds, while innovative financial instruments, come with their own set of limitations and risks. Here are some key points to consider:
  • Currency Risk: Investors bear the risk of currency fluctuations. If the Indian rupee depreciates against the investor’s home currency, they incur losses.
  • Regulatory Risks: Changes in regulations can affect the attractiveness of masala bonds to investors. For example, tax laws or repatriation rules might change, impacting returns.
  • Market Risks: The success of masala bonds depends on the market’s confidence in the Indian economy. Any negative sentiment can reduce investor interest and liquidity.
  • Interest Rate Risk: Masala bonds are sensitive to interest rate fluctuations in India. If the Reserve Bank of India (RBI) cuts rates, the bonds become less appealing due to lower yields.
  • Credit Risk: The creditworthiness of the issuer is crucial. A downgrade in the issuer’s credit rating can affect bond prices and investor confidence.
  • Taxation: There’s a 5% withholding tax on the interest paid to investors, which may deter those seeking higher returns.
  • Use of Proceeds: The funds raised through masala bonds are restricted in their use, such as not being allowed for certain real estate activities or capital market investments.
  • Sustainability: The long-term sustainability of financing through masala bonds is uncertain, as global investors may be cautious about emerging market currency risks.
  • These points highlight the need for thorough due diligence and consideration of market conditions when dealing with masala bonds.

Case Studies:

  • International Finance Corporation (IFC): The IFC, part of the World Bank Group, issued the first Masala Bonds on the London Stock Exchange in November 2014. These bonds were aimed at funding infrastructure development projects in India.
  • Housing Development Finance Corporation (HDFC): HDFC became the first Indian corporate to issue Masala Bonds in July 2016. This issuance was significant as it opened avenues for other corporates in India to raise funds from international markets.
  • National Thermal Power Corporation (NTPC): NTPC issued Green Masala Bonds, becoming the first Indian state-owned corporate to do so. The funds raised were earmarked for environmental development projects.
  • Kerala Infrastructure Investment Fund Board (KIIFB): In a pioneering move, KIIFB became the first sub-sovereign entity in India to issue Masala Bonds. In May 2019, they listed a ₹2,150 crore issuance on the London Stock Exchange, marking a significant step for Indian states in accessing international markets.
  • These case studies highlight the growing confidence of international investors in the Indian economy and the Indian Rupee. Masala Bonds have provided a novel way for Indian entities to raise funds while mitigating currency risk.

Role of Masala Bonds in the Indian economy:

  • Masala Bonds play a significant role in the Indian economy by allowing Indian entities to raise funds from international markets in Indian rupees.
  • Here’s an overview of their impact:
  • International Investment and Currency Risk: Masala Bonds attract foreign investment into India, as they are denominated in Indian Rupees but settled in US dollars. This means foreign investors can invest in the Indian market while taking a view on the Indian Rupee’s performance. Importantly, the currency risk lies with the investors, not the issuers.
  • Infrastructure Development and Refinancing: The funds raised through Masala Bonds are often used for infrastructure projects, refinancing of rupee loans, and providing working capital to corporates. This supports the development of critical infrastructure and helps businesses manage their finances more effectively.
  • Market Diversification: By issuing bonds in international markets, Indian entities can diversify their investor base. This can lead to more stable financing options and potentially lower the cost of borrowing.
  • Strengthening the Domestic Bond Market: The introduction of Masala Bonds has also spurred the development of the domestic bond market by providing competition with overseas markets. This competition can lead to better terms for issuers and more options for investors.
  • Tax Benefits: Investors in Masala Bonds can benefit from tax exemptions on capital gains arising from rupee denomination, which can make these bonds an attractive investment option.
  • In summary, Masala Bonds have become a vital tool for Indian entities to access international capital, manage currency risk, and fund growth and development within the country. They also contribute to the internationalization of the Indian Rupee and the development of India’s financial markets.


  • In conclusion, Masala Bonds represent a significant innovation in the Indian financial landscape, offering a unique opportunity for Indian entities to tap into global markets while mitigating currency risk.
  • These rupee-denominated bonds have not only enabled Indian companies to raise funds in their local currency but have also attracted international investors looking to participate in India’s growth story.
  • As India continues to develop its infrastructure and bolster economic growth, Masala Bonds could play a pivotal role in financing these ambitions. By allowing access to foreign capital without the associated exchange rate volatility, these instruments could be a game-changer for India’s quest for sustainable development and a testament to the country’s resilience and appeal in the global financial arena.

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