Masala Bonds

Masala Bonds are rupee-denominated bonds issued outside India, primarily in international markets, to raise capital from foreign investors. These bonds allow Indian entities to access overseas funding while shielding themselves from the risk of currency depreciation. The term ‘Masala’, meaning spice in Hindi, symbolises the Indian origin of these financial instruments and reflects the country’s growing presence in global capital markets.

Background and Introduction

The concept of Masala Bonds was introduced to strengthen India’s financial integration with global markets and attract foreign investment in Indian infrastructure and corporate sectors. The International Finance Corporation (IFC), an arm of the World Bank Group, issued the first Masala Bonds in November 2014 to raise ₹1,000 crore for infrastructure projects in India.
Following the IFC’s success, the Reserve Bank of India (RBI) and the Ministry of Finance formally approved the issuance of Masala Bonds by Indian companies in 2016 under the External Commercial Borrowing (ECB) framework. The bonds were designed to encourage Indian corporations, banks, and government agencies to diversify their sources of funding and reduce dependence on domestic borrowing.

Definition and Key Features

A Masala Bond is a bond issued outside India but denominated in Indian Rupees (INR) rather than in a foreign currency such as the US Dollar or Euro. This unique structure ensures that the currency risk is borne by the investor instead of the issuer.
Key features include:

• Currency Denomination: Indian Rupees (INR).
• Issuer: Indian entities such as public sector undertakings (PSUs), corporations, and financial institutions.
• Investor Base: Global investors including individuals, institutional investors, and foreign funds.
• Market of Issue: International financial centres such as London, Singapore, and Hong Kong.
• Tenure: Minimum of three years, with flexibility depending on project requirements.
• Regulation: Governed by the RBI’s External Commercial Borrowings (ECB) guidelines.

Objectives of Masala Bonds

The introduction of Masala Bonds serves multiple economic and strategic objectives:

• To diversify funding sources for Indian corporates and reduce pressure on domestic financial markets.
• To attract foreign capital for infrastructure and development projects.
• To promote the internationalisation of the Indian Rupee by increasing its visibility in global markets.
• To reduce currency risk exposure for Indian borrowers.
• To strengthen India’s global financial presence and build investor confidence in its economic fundamentals.

Working Mechanism

When an Indian entity issues Masala Bonds in an overseas market, the bonds are sold to foreign investors in Indian Rupees. The investor makes the payment in a foreign currency, which is then converted into INR at the prevailing exchange rate. At the time of repayment, the issuer returns the principal and interest in rupees, while the investor bears the risk of any fluctuation in the exchange rate between the rupee and their home currency.
For example, if the rupee depreciates against the dollar during the bond’s tenure, the investor receives fewer dollars upon conversion, thus absorbing the currency risk. This mechanism makes Masala Bonds a cost-effective and stable financing tool for Indian issuers.

Regulatory Framework

The issuance of Masala Bonds is governed by the Reserve Bank of India’s External Commercial Borrowing (ECB) guidelines and the Foreign Exchange Management Act (FEMA). The framework specifies:

• Bonds must be issued in INR, not in foreign currency.
• Proceeds must be used for approved purposes such as infrastructure development, affordable housing, and renewable energy.
• Minimum maturity period: three years (five years if the borrowing amount exceeds USD 50 million equivalent).
• Investment limit: set according to RBI regulations and international investor norms.
• Interest rate ceiling: determined in accordance with prevailing market conditions and investor demand.

These regulations ensure prudent financial management and safeguard against excessive external debt accumulation.

Major Issuers of Masala Bonds

Since their introduction, several prominent Indian entities have issued Masala Bonds in international markets. Key issuers include:

• HDFC Limited – the first Indian corporate to issue Masala Bonds worth ₹3,000 crore in 2016.
• National Thermal Power Corporation (NTPC) – raised ₹2,000 crore in 2016 for clean energy projects.
• Indian Renewable Energy Development Agency (IREDA) – launched India’s first Green Masala Bonds on the London Stock Exchange in 2017, raising ₹1,950 crore to fund renewable energy projects.
• National Highways Authority of India (NHAI) – issued Masala Bonds for infrastructure financing.
• Yes Bank – became the first private bank to issue Masala Bonds in the London market.

These issuances have strengthened the reputation of Indian firms in global capital markets and demonstrated the growing investor confidence in India’s economic prospects.

Advantages of Masala Bonds

Masala Bonds offer several advantages to both issuers and investors:
For Issuers:

• Reduced currency risk: Repayments are made in Indian Rupees, protecting issuers from currency fluctuations.
• Access to global capital: Enables Indian firms to tap foreign investors and diversify funding sources.
• Lower borrowing costs: Often provide competitive interest rates compared to domestic borrowings.
• Enhanced visibility: Promotes Indian financial instruments in international markets.

For Investors:

• Attractive returns: Investors can benefit from higher interest rates in India compared to developed markets.
• Portfolio diversification: Provides exposure to emerging market assets.
• Participation in India’s growth story: Offers global investors a stake in India’s expanding economy.

Economic and Strategic Significance

The issuance of Masala Bonds carries broader macroeconomic significance:

• Internationalisation of the Rupee: Promotes wider use of the Indian currency in global financial transactions.
• Infrastructure financing: Mobilises long-term funds for national development projects in energy, transport, and urban infrastructure.
• Foreign investment inflow: Encourages sustainable foreign capital without increasing foreign currency liabilities.
• Strengthened financial diplomacy: Enhances India’s image as a stable and attractive investment destination.

Challenges and Limitations

Despite their advantages, Masala Bonds face several challenges:

• Currency volatility: Persistent depreciation of the rupee may deter foreign investors.
• Limited market depth: The investor base remains relatively small compared to foreign currency bonds.
• Higher yields: Investors demand a risk premium for investing in emerging market currencies.
• Regulatory complexities: Compliance with multiple jurisdictions can increase issuance costs.
• Global interest rate fluctuations: Rising rates in developed economies can reduce the attractiveness of Indian bonds.

Recent Developments

In recent years, the Indian government and RBI have taken measures to boost the issuance of Masala Bonds. These include:

• Allowing state-owned enterprises and municipalities to raise funds through Masala Bonds for infrastructure and smart city projects.
• Encouraging Green Masala Bonds to fund climate-friendly and sustainable initiatives.
• Listing Masala Bonds on international exchanges such as London, Singapore, and Luxembourg to attract global investors.

IREDA’s 2017 Green Masala Bond remains a landmark, as it raised international awareness about India’s renewable energy financing framework. The instrument demonstrated how green finance can be integrated with India’s sustainable development goals.

Future Outlook

Masala Bonds are expected to play an increasingly important role in financing India’s sustainable development agenda. As India advances towards its target of 500 GW of renewable energy capacity by 2030 and significant investments in infrastructure and smart cities, the demand for external funding will rise.
The continued promotion of Masala Bonds, especially in green and infrastructure-linked formats, can help India attract responsible international investment while strengthening the Indian Rupee’s position in global finance.