31 Jul, 2025
6 mins read
Raising capital from international markets is often a strategic necessity for Indian companies. However, challenges such as currency risk and regulatory hurdles can complicate the process. Masala Bonds provide a unique solution. These are rupee-denominated debt instruments issued overseas that allow Indian entities to access global funding while transferring currency risk to investors. This article explains what Masala Bonds are, outlines their features and benefits, provides investment guidance, and presents real-world examples.
Masala Bonds are financial instruments issued outside India but denominated in Indian rupees. These bonds are sold to foreign investors, who effectively lend money in Indian currency. As the repayment is also in rupees, the issuer does not bear the currency risk. Instead, the investor is exposed to the potential depreciation or appreciation of the rupee.
The idea is to enable Indian companies, non-banking financial companies (NBFCs), and government-linked institutions to access international capital without the need to raise funds in a foreign currency. By doing so, they avoid complications arising from currency conversion and reduce the risk of rising repayment costs due to exchange rate fluctuations.
The term “Masala” was coined by the International Finance Corporation (IFC), a member of the World Bank Group, which launched the first such bond in 2014. The name reflects Indian culture, much like other globally recognised Indian exports such as Bollywood films and Indian spices. The idea was to brand the bonds in a way that emphasises India’s unique identity and appeal to global investors.
Masala Bonds possess certain distinctive features that set them apart from other types of international borrowing.
Denomination: These bonds are denominated in Indian rupees, although issued and traded in overseas markets.
Currency Risk: The exchange rate risk is borne by the foreign investor, not the Indian issuer.
Listing: Masala Bonds are typically listed on international exchanges such as the London Stock Exchange and the Singapore Exchange.
Maturity Period: Bonds up to USD 50 million must have a minimum maturity of three years, while larger issues require a minimum of five years.
Issuers: Eligible issuers include Indian corporates, NBFCs, and certain government-related entities.
End-use Restrictions: The funds raised cannot be used for investment in capital markets, real estate, land purchases, or onward lending for such purposes.
Masala Bonds fall under the Reserve Bank of India’s External Commercial Borrowings (ECB) framework. The RBI has laid down specific norms to regulate their issuance:
Eligible Entities: Indian companies, NBFCs, and infrastructure investment trusts are allowed to issue Masala Bonds.
Minimum Tenure: Three years for issues up to USD 50 million and five years for larger borrowings.
Cost Ceiling: The total borrowing cost, including interest, must remain within the ceiling specified by the RBI.
Permitted Use of Proceeds: The funds can be used for refinancing rupee loans, infrastructure development, and general business purposes.
Prohibited Uses: The proceeds must not be used for land acquisition, investment in real estate, or speculative activities.
Investor Requirements: Investors must reside in countries that comply with the Financial Action Task Force (FATF) standards and whose regulators are members of the International Organisation of Securities Commissions (IOSCO).
Reporting: Issuers must report the transaction through authorised dealer banks in accordance with FEMA rules.
Masala Bonds offer several advantages for both issuers and investors.
No Currency Risk: Since repayment is in rupees, issuers are protected from exchange rate volatility.
Access to Foreign Capital: These bonds open up new avenues for fundraising from international markets.
Enhanced Credibility: Listing on reputed international exchanges can improve the issuer’s global profile.
Diversification: Companies can reduce their dependence on domestic borrowing channels.
Higher Returns: These bonds often offer better yields than similar instruments in developed markets.
Exposure to India’s Growth: Investors can participate in India’s economic potential without direct equity exposure.
Fixed Income Security: Suitable for conservative investors who prefer predictable income.
Tax Efficiency: Some jurisdictions offer tax incentives on capital gains from rupee appreciation, depending on bilateral treaties.
Foreign institutional investors can access Masala Bonds through global brokerage firms that offer access to international debt markets. The process typically involves:
Selecting a Broker: Choose a brokerage platform that lists Masala Bonds.
Due Diligence: Review the credit rating and financial strength of the issuer.
Risk Assessment: Understand currency, credit, and interest rate risks.
Transaction Execution: Place an investment order and track performance over time.
Retail investors might find it easier to invest indirectly through mutual funds or exchange-traded funds (ETFs) that include Masala Bonds in their portfolio.
Masala Bonds have been successfully issued by various Indian organisations across sectors:
International Finance Corporation (IFC): The first Masala Bond issuer, raising around INR 1,000 crore to support infrastructure projects.
Housing Development Finance Corporation (HDFC): Raised INR 3,000 crore to fund affordable housing.
National Thermal Power Corporation (NTPC): Issued Masala Bonds worth INR 2,000 crore for clean energy development.
Indian Railway Finance Corporation (IRFC): Used the bond proceeds for Indian Railways’ modernisation and expansion.
These examples demonstrate the wide applicability of Masala Bonds in funding essential sectors such as housing, energy, and transport.
Despite their advantages, Masala Bonds are not without challenges:
Currency Risk for Investors: Foreign investors are exposed to the risk of rupee depreciation.
Liquidity Constraints: Trading volumes remain relatively low, which may affect ease of entry and exit.
Regulatory Compliance: Issuers must navigate multiple regulatory requirements, including RBI and FEMA rules.
Interest Rate Sensitivity: Rising domestic interest rates can impact the market value of existing bonds.
Efforts by regulators like the RBI and SEBI to streamline processes and improve transparency aim to address these concerns and deepen the market.
Masala Bonds are a powerful tool that allow Indian companies to raise funds globally while maintaining control over currency exposure. They enable access to foreign capital and offer investors a chance to earn attractive returns while gaining exposure to India’s economy.
Although Masala Bonds come with certain limitations, such as exchange rate and liquidity risks, their advantages often outweigh the drawbacks. With proper regulatory support and growing investor interest, these bonds are likely to play an increasingly important role in India’s financial ecosystem.
Indian corporates, NBFCs, and certain Indian government-backed institutions are eligible, as per RBI regulations.
The minimum maturity is three years for bonds up to USD 50 million and five years for larger issues.
They can be considered safe if issued by financially sound organisations and rated by reliable credit agencies. However, investors must consider currency and interest rate risks.
Yes, interest income is taxable based on the tax laws of the investor's country. Non-resident investors may also face withholding taxes.
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