Masala Bonds

What is Masala Bond?

Masala Bonds represent rupee-denominated bonds that Indian entities issue outside of India. An example of Masala bonds is when the Indian Railway Finance Corporation (IRFC) issued rupee-denominated bonds in the international market, raising funds for rail infrastructure development. Masala bonds are a financial instrument that allows Indian companies or organisations to raise capital from foreign investors in Indian currency (INR) rather than the local currency of the investor. 

Introduced in 2014 by the International Finance Corporation (IFC), the primary objectives of Masala Bonds are to fund infrastructure projects, promote internal growth through borrowings, and internationalise the Indian rupee. Understanding the masala bonds meaning involves recognizing them as rupee-denominated bonds that allow Indian companies to secure funds in foreign currencies, thereby minimising currency risk for both issuers and investors on a global scale.

Since Masala Bonds are issued in Indian currency, the currency risk lies with the investor and not the borrower. This means if the Indian rupee depreciates, the foreign investor bears the loss. Masala Bonds are an attractive option for foreign investors looking to invest in Indian assets and for Indian entities seeking to diversify their funding sources and tap into the global capital market.
 

Features of Masala Bonds

Masala Bonds offer a distinctive way for Indian entities to raise funds from international markets while ensuring the debt remains denominated in Indian Rupees. Some of the main features include:

• Rupee Denomination: Despite being sold in global markets, these bonds are priced in Indian Rupees. This shields the issuer from foreign exchange losses, transferring currency fluctuation risk to the investor.
• Eligible Issuers: Companies registered in India — including public sector undertakings, banks, and infrastructure investment trusts — are permitted to issue Masala Bonds under the regulatory guidelines.
• International Exchange Listings: To reach a broader pool of investors, these bonds are typically listed on major international platforms such as the London Stock Exchange or Singapore Exchange.
• Maturity Terms: The maturity period varies based on the total capital raised. For instance, bonds with a size up to USD 50 million (in INR equivalent) must have a minimum term of three years. Those exceeding that limit require a minimum of five years.
• Attractive Yields: Masala Bonds often carry interest rates that are competitive — and in some cases slightly elevated — to account for the currency risk borne by overseas investors.
• Use of Funds: The capital raised is allocated towards infrastructure projects, business expansion, debt refinancing, or other purposes deemed eligible under India’s external commercial borrowing regulations.
• Investor Participation: These instruments attract a wide array of international investors including institutional funds, sovereign wealth managers, and retail investors from countries that adhere to Financial Action Task Force (FATF) guidelines.
   

Characteristics Of Masala Bonds

Masala Bonds differ from other international debt options in several meaningful ways. These characteristics are shaped by both regulatory considerations and market positioning:

• Debt in Local Currency: Even though the bonds are issued abroad, all principal and interest payments are made in Indian Rupees. As a result, the investor, not the issuer, takes on the exchange rate exposure.
• Regulatory Oversight: Only investors from jurisdictions that comply with FATF rules and whose market regulators are affiliated with IOSCO can subscribe. The issuance and management of these bonds fall under the jurisdiction of both the Reserve Bank of India and the regulatory body of the country where they are listed.
• Eligible Institutions: India-backed multilateral and regional financial institutions are also permitted to invest in Masala Bonds, adding a layer of credibility and support.
• Currency Transactions: All currency conversions — whether for issuance or interest payments — are conducted at prevailing market exchange rates, adding transparency and regulatory alignment.
• Gateway to Indian Markets: Masala Bonds serve as an effective channel for foreign capital to enter India, strengthening cross-border financial engagement and contributing to the country’s macroeconomic stability.
   

Where Can The Proceeds From These Bonds Be Used

The proceeds raised from Masala Bonds can be used for the following purposes:
●     Refinancing of rupee loans and non-convertible debentures. 
●     Development of integrated townships and affordable housing projects. 
●    Working capital for corporations.

However, the Reserve Bank of India (RBI) has placed restrictions on the usage of proceeds from Masala Bonds. The funds cannot be used for real estate activities (excluding approved projects), activities prohibited by Foreign Direct Investment guidelines, investing in domestic capital markets, purchasing land, or on-lending to other entities for restricted purposes.
 

Benefits Of Masala Bonds

For Investors:

●    Higher Interest Rates: Masala Bonds generally offer higher interest rates compared to other investment options, making them attractive to foreign investors.
●    Confidence in the Indian Economy: Investing in Masala Bonds helps build foreign investors' confidence in the Indian economy and supports the internationalisation of the Indian Rupee.
●    Strengthening Foreign Investments: Masala Bonds facilitate foreign investors' confidence in Indian currency, encouraging more investments in the country.

For Borrowers:

●    No Currency Risk: Masala Bonds are issued in Indian currency, protecting the borrower from currency fluctuations, as the currency risk is borne by the investor.
●    Mobilizing Funds: Borrowers can mobilise a large number of funds through Masala Bonds, which can be used for various purposes such as infrastructure projects, refinancing loans, or providing working capital.
●    Portfolio Diversification: Issuing Masala Bonds helps Indian entities diversify their debt portfolio and reduce their reliance on domestic funding sources.
 

Masala Bonds vs Dim Sum Bonds vs Samurai Bonds

Masala Bonds, Dim Sum Bonds, and Samurai Bonds are all examples of foreign-currency-denominated bonds issued by entities from one country to raise funds in the currency of another country.

●    Masala Bonds: Masala bonds Issued by Indian entities in Indian Rupees (INR) to raise funds from foreign investors. These bonds expose investors to currency risk but shield borrowers from currency fluctuations.
●    Dim Sum Bonds: Issued by Chinese entities in Chinese Renminbi (RMB) to raise funds from foreign investors. Like Masala Bonds, investors bear the currency risk, and borrowers are protected from currency fluctuations.
●    Samurai Bonds: Issued by non-Japanese entities in Japanese Yen (JPY) to raise funds in Japan. In this case, borrowers assume the currency risk, and investors are protected from currency fluctuations.
 

Who Can Invest in Masala Bonds?

Masala Bonds are designed to appeal to a diverse spectrum of international investors seeking exposure to India’s economic trajectory through fixed-income products. Common investor categories include:

• Foreign Institutional Investors (FIIs): Global investment firms and asset management companies are among the largest participants, often using these bonds to diversify their portfolios while capitalizing on India's long-term growth prospects.
• Global Mutual and Hedge Funds: Funds that focus on emerging markets frequently allocate a portion of their capital to Masala Bonds. Their India-centric strategies often include fixed-income instruments like these to hedge risk while pursuing returns.
• High Net-Worth Investors (HNIs): Wealthy individuals from outside India, particularly those seeking to invest in rupee-denominated assets, often see these bonds as a useful diversification tool within their portfolios.
• Development Institutions: Multilateral organizations like the International Finance Corporation (IFC) and Asian Development Bank (ADB) invest in Masala Bonds as part of their mission to support economic development in India.
• Pension and Insurance Funds: Long-term institutional investors such as pension managers, insurance firms, and foreign banks find Masala Bonds to be suitable for balancing their international exposure with stable rupee-based returns.

Limitations of Masala Bonds

Despite their advantages, Masala Bonds also carry certain challenges and limitations that must be weighed carefully by both issuers and investors:

• Restrictions on Fund Deployment: The Reserve Bank of India mandates that proceeds from these bonds be used only for specific purposes — such as infrastructure or affordable housing. Prohibited uses include speculative activities like land acquisition or stock market investment.
• Market and Geopolitical Risks: Given that the bonds are issued in foreign jurisdictions, they are influenced by global political and economic developments. Volatility in emerging markets can directly impact investor sentiment and pricing.
• Currency Risk for Investors: While issuers benefit from insulation against forex movements, investors face potential losses if the Indian Rupee weakens over the bond’s tenure. This makes the return profile riskier from a foreign investor’s perspective.
• Compliance Demands: Issuers are expected to meet not only RBI requirements but also those of the host country’s market regulators. Failing to meet these standards could result in penalties or reputational damage, underscoring the need for meticulous regulatory adherence.
   

Conclusion

Masala Bonds represent a strategic financing option for Indian issuers looking to tap into international capital without taking on currency risk. At the same time, they provide foreign investors an opportunity to gain exposure to India’s economy through fixed-income securities. Although not without challenges — such as compliance burdens and exposure to rupee depreciation — these instruments continue to gain traction as a viable tool for global capital integration and sustainable economic funding.