written by | April 25, 2022

Masala Bonds and What Makes Them So Appealing

If the term masala bonds surprise you, think of Dim-Sum and Samurai bonds. These are the names of Chinese and Japanese bonds. The International Finance Corporation (IFC) coined the term 'masala bonds' to evoke the flavour of Indian spices. These bonds are rupee-denominated financial instruments. These debt instruments play an important role in raising funds from overseas investors. The funds are raised in the local currency. Both governments, as well as private corporations have the authority to issue such bonds. The investors bear the risk involved in these bonds.

Many overseas investors are keen to invest in diverse assets in India. Masala bonds are one such Indian asset. Some of the corporates featured in the list of masala bonds issued by Indian companies include National Thermal Power Corporation (NTPC), Indiabulls, and Housing Development Finance Corporation Limited (HDFC). These are known to have raised funds through such bonds. These types of bonds help such entities to raise finance from overseas investors without having to bear any risks in the event of any financial contingency like depreciation of the Indian rupee.

Did you know?

In 2019, Kerala became the first Indian state to issue Masala Bonds worth ₹2,150 crores on the London Stock Exchange. The state-owned Kerala Infrastructure Investment Fund Board (KIIFB) had issued the bonds to raise funds in the overseas market. 

Also Read: Surety Bonds to Replace Bank Guarantees in Government Procurements: FM

What are Masala Bonds?

Masala bonds serve as a popular investment choice for overseas investors. Issued in rupees, the principal amount and interest repayment are in US dollars. Since they yield a high-interest rate, they have become a popular choice of financial investments. External commercial borrowings (ECB) involve the borrowing of financial capital from distinct sources outside the territory of India. This source of funds is procured at a lower interest rate than the ones prevailing back home (India).

Countries like the USA and Europe are known for zero interest rates on sourcing such funds. The ECB policy has expanded the scope of borrowers who can issue such bonds in foreign countries. Some of these entities include real estate investment trusts and limited liability partnership organisations (LLPs). These debt instruments have to adhere to the Reserve Bank of India (RBI). Through these bonds, Corporates can raise funds to the extent of USD 750 million, i.e., ₹5,690 crores in a single year.

Key Characteristics of Masala Bonds

Borrowers' eligibility:

The ECB policy has expanded the scope of masala bonds. An organisation registered under the 1956 Companies Act and Indian banks are authorised to issue these bonds to overseas investors. This increases the chances of benefiting from a more extensive base of investors. Any Indian corporation under the scrutiny of the enforcement directorate for various reasons will have to seek RBI's approval to issue masala bonds.

Overseas investors who reside outside India can make investments in these debt instruments.

Investors who are residents of the country in which they wish to invest in masala bonds have to comply with certain pre-conditions, namely:

  • In any country that is a member of the Financial action task force (FATF), masala bonds can be issued. A resident of such a country can invest in them. The country could also be a member of a similar regional entity.
  • The sale or transfer of such bonds has to meet all the conditions laid down by the FATF and the International Organisation of Securities Commissioners (IOSCO). IOSCO is a globally acclaimed entity that sets universal standards for the securities sector worldwide.
  • The borrowings can extend up to ₹50 billion in a single financial year. Anyone desirous of exceeding this amount of borrowings will have to take the requisite permission from the Reserve Bank of India.
  • Financial institutions can subscribe to masala bonds in geographical territories around the world where India is a member country.
  • Hedging: Overseas investors can indulge in hedging to minimise the risk of price volatility. They will be able to do so through derivative products, which are permissible with AD category-I banks in India. These banks are authorised to undertake all capital transactions in accordance with the norms of the Reserve Bank of India. Investors can access Indian banks through their subsidiaries abroad.

The maturity time frame of masala bonds:

A maturity time frame of 3 years is a prerequisite for borrowings made up to the extent of ₹ 50 billion.

For borrowings that exceed ₹ 50 billion, the maturity time frame is 5 years.

These bonds are converted at the prevailing market rate on a specific date on which the transactions are settled, i.e., their issuance or redeeming.

Where Can the Proceeds From These Bonds Be Used?

The proceeds of masala bonds can be used for various purposes, some of which include the following:

  • Developing integrated townships in India
  • Creating affordable housing projects in India
  • Increasing the working capital of corporates
  • Refinancing of rupee loans
  • Refinancing of non-convertible debentures

You cannot use the proceeds for:

  • Any other vested real estate interests than the ones described above
  • Making funds available to other institutes or corporates
  • Making land purchases
  • Making investments in the capital market or domestic investments in equity

Also Read: Exploring the Best Options for Gold Investing

Benefits of Masala Bonds to Borrowers

  • The low rates of interest make them very attractive instruments of investment. This makes borrowers enjoy more savings.
  • These debt instruments involve zero currency risks, and thus the borrowers are protected from currency volatility.
  • The proceeds from masala bonds can help develop affordable housing projects and develop integrated townships in India.
  • These help investors expand their portfolios and diversify into lucrative opportunities.
  • The proceeds can also enhance the working capital of corporations.
  • These bonds help to increase the large number of global investors.

Benefits of Masala Bonds to Investors

  • Masala bonds furnish high-interest rates. Investors benefit from the same.
  • These bonds increase the trust of overseas investors in Indian ventures.
  • Masala bonds enhance the confidence of overseas investors in the Indian rupee.
  • In the event of a rupee appreciation coinciding with the maturity time frame of these bonds, the investors stand to enjoy maximum returns.

Benefits to the Indian Economy

  • International interest rates of globally established currencies like the Euro, Yen, US dollar or even the pound sterling are extremely low. Indian entities stand to gain by raising funds by issuing such bonds.
  • These bonds help make the world more familiar with the strengthening Indian rupee and the benefits that can accrue from this currency.
  • Established entities or borrowers are protected from fluctuations that may take place in currencies.
  • Masala bonds can establish the rupee as a desirable currency to reckon with across the world.
  • The Indian domestic bond markets will be able to develop speedily because of the competition from investors abroad. This will help create a new opportunity for investors in the retail space.

Some Areas of Concern

  • The Reserve Bank of India has been introducing intermittent rate cuts in these bonds, and this has reduced the amount of investments.
  • The proceeds from these bonds have restricted usage. Beyond the areas listed by the RBI, these bonds cannot be used.
  • Moody's – the global entity that opines on credit risk, has expressed doubts about financing through these bonds as the currency risks around the globe are quite volatile.


The details of this article clearly define what a masala bond is. The details affirm the relevance of masala bonds and how they benefit borrowers, investors, and India. The proceeds from such bonds are used for very interesting projects, and RBI has ensured that borrowers do not misuse the proceeds for vested interests.
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Q: What are masala bonds RBI?


These are rupee-denominated bonds issued by Indian entities but outside of India. They are governed by the regulations of the Reserve Bank of India. Both the Indian government as well as private enterprises can issue masala bonds.

Q: What is one of the most significant benefits of masala bonds?


They help Indian entities to raise funds at very low rates and allow them to use the proceeds in the larger interests of the Indian economy.

Q: Can the proceeds from masala bonds be used to purchase land?


No. The proceeds are used for activities like the development of affordable housing and integrated township projects, among others, but not for the purchase of land.

Q: Which Indian entity first resorted to masala bonds?


The Kerala Infrastructure Investment Fund Board which is owned by the state of Kerala, was the first to resort to masala bonds.

Q: Why are masala bonds so popular?


They are popular because borrowers can raise funds at very low rates of interest, use the proceeds towards enhancing the economy and increase their investor base. The yield from such bonds is extremely attractive.

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