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Masala bonds: An overview of India’s innovative debt instruments

Masala bonds are a financial tool for Indian firms to raise capital from foreign markets in rupees. Learn more.

masala bonds

The global bond market offers enticing opportunities to various organisations looking to generate capital for particular overseas initiatives. New and creative instruments are constantly being introduced to meet the broad range of demands of issuers and investors in the ever-changing field of finance. The masala bond is one such addition to the market that has become pretty famous in recent years. 

Although the International Finance Corporation (IFC) was the first to use masala bonds to acquire foreign capital, many other Indian enterprises have gradually adopted this strategy. What is a masala bond, and why is it so special, then? 

This article takes a deep dive into masala bonds and analyses their meaning, characteristics, advantages, and possible impacts on the financial system.

Also read: Bond voyage: Unraveling the intrigue of Bonds

What are masala bonds?

The Hindi term for spices is “masala.” The IFC coined the phrase as a reference to Indian cuisine and cultural traditions. Masala bonds are a financial instrument that Indian companies issue in outside markets to generate capital instead of using dollars or local currencies. The idea behind masala bonds is that they are paid in US dollars but are valued in Indian Rupees

In 2014, the IFC Masala Bonds were first issued to finance infrastructure projects in India. Masala bonds are sold outside of India by Indian organisations or businesses to raise money. These bonds are not being issued in local currency but instead in INR. 

International investors may profit from bond interest rates while investing in the Indian market with a positive outlook on the INR currency. The concept of foreign bonds is quite prevalent in the world of international bonds. 

Even though onshore rupee bonds provide greater rates, masala bonds are proved to be in demand. For instance, the five-year masala bond from NTPC (National Thermal Power Corporation) was priced at 7.28%, 22 basis points less than the 7.5% price of comparable-tenor notes sold onshore.

Examples of masala bonds

2014The first-ever Masala bonds with a maturity of ten years and ten billion Indian rupees are issued by the International Finance Corporation (IFC).
2015To raise 3.15 billion for private sector investments in climate change, the International Finance Corporation (IFC) issued the first-ever Green Masala bonds.
2016With the issuance of Masala bonds, HDFC successfully raised ₹3000 crore, making it the first Indian business to do so.
2016The NTPC has successfully issued the very first corporate green Masala bonds, valued at ₹2000 crore.
2019Through the issue of ₹2,150 crore on the London Stock Exchange, the Kerala Infrastructure Investment Fund Board (KIIFB) attained the distinction of becoming the first sub-sovereign body in India to have access to the international bond market.
2021The Asian Development Bank has listed masala bonds with a maturity of ten years, with a total value of ₹300 crore.

Also read: Government bonds in India – Meaning, types and features

Features of masala bonds

A number of distinctive qualities separates masala bonds from other kinds of bonds, including the following:

  1. Citizens of countries who are members of the Financial Action Task Force (FATF) are the only people who are permitted to purchase bonds issued by the organisation. 
  2. There are two ways to acquire them: either via private placement or by listing on exchanges.
  3. The regulatory body that oversees the trading of securities in the country in which the investor lives is required to be a member of the International Organisation of Securities Commission. This guarantees that investors are protected and that regulatory supervision is maintained.
  4. The number of investors may be increased by allowing financial institutions, of which India is a member, to subscribe to masala bonds.
  5. Bonds issued up to fifty million dollars in the United States within a single fiscal year must have a minimum maturity length of three years. Additionally, bonds greater than fifty million dollars must have a minimum maturity length of five years.
  6. It is possible to use the earnings to develop affordable housing projects in India. Along with that, there is the increment of the working capital of corporations, the refinancing of non-performing debts, and the refinancing of rupee debts.
  7. Land purchases, financing other corporations, or investments in financial markets are not permitted to be made with the revenues.

Pros and cons of masala bonds

While there are many perks of masala bonds, a few limitations are attached to them as well. Let’s cover the benefits first.

Masala bonds advantages:  

  • For international investors without access to the domestic market via the Foreign Portfolio Investing (FPI) or Foreign Institutional Investor (FII) channels, masala bonds have created a new avenue for investing.
  • Because FPI registration is not required in India, there is also less paperwork to do.
  • Due to the lower funding costs and interest rates, it is advantageous for borrowers.
  • These bond issuers are unaffected by the rupee’s decline in value.
  • Indian businesses gain from the low rates of interest on US dollars, euros, pound sterling, and yen when they issue masala bonds to borrow capital.
  • It is a simple way to familiarise foreign investors with the Indian rupee, expanding its market reach. 
  • Because of the competition from the foreign market, it will also accelerate the growth of the local bond markets.

Masala bonds disadvantages:

  • RBI guidelines state that the money obtained from these bonds can only be used to build low-cost housing developments or cohesive townships.
  • Moreover, it can only be used for the originally stated purposes, including purchasing land, making capital market investments, and making loans to other companies for real estate-related needs. These restrictions might make masala bonds’ primary objective less achievable.
  • When investing in emerging-market currencies, investors should proceed with caution because the long-term viability of financing through Masala Bonds presents certain challenges.
  • The RBI’s frequent rate cuts have resulted in a decline in investor interest in masala bonds. 

Also read: What are inflation-indexed bonds, and why should you care?


Masala bonds could end up being a workable way to pay for the operational costs of many Indian development initiatives, like building smart cities and a digital India. They help build trust among investors, which could lead to more foreign investment in India. However, depending too much on masala bonds may impact the sovereign rating negatively and worsen the external debt problem.

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