Masala Bonds Explained: Features, Types, Benefits, and Risks

If you’ve been following how Indian companies raise money from global markets, you might have come across the term “masala bonds” more than once. These bonds have become a popular tool for funding, especially when the goal is to avoid the usual currency risks tied to foreign borrowing. 

In this blog, you’ll explore all the essential details about masala bonds. We’ll walk you through what they are, their key features, the different types available, and the benefits they offer. You’ll also see some examples of notable masala bond issues, understand how they stack up against other instruments, and get a clear understanding of the risks involved. 

Whether you’re a finance enthusiast or just curious about how Indian companies tap into international capital, this guide will keep things simple and easy to follow.

Let’s get started!

What Are Masala Bonds?

Masala bonds are bonds issued by Indian companies but sold to buyers outside India. The key point is that these bonds are denominated in Indian rupees, not foreign currencies. This means when you buy masala bonds, the money involved is in rupees, and the interest and repayments are also made in rupees.

The name “masala” was given to these bonds to give them a distinctly Indian identity, similar to how bonds issued in Japan are called “samurai bonds.” Companies use these bonds to fund projects such as infrastructure development, repay existing loans, or support business growth. The Reserve Bank of India regulates masala bonds to keep the process safe and transparent for everyone involved.

Now that you understand what masala bonds are, let’s take a closer look at the main features that make them unique.

Key Features of Masala Bonds

Masala bonds have become an important tool for Indian companies to raise funds from global markets. Here are the key features that define these bonds:

• Rupee-Denominated Bonds: Masala bonds are issued in international markets, but the currency used is Indian rupees, not foreign currencies.

• Issued by Indian Entities Abroad: Only Indian organizations, including both government bodies and private companies, can issue these bonds in overseas markets to raise funds.

• Who Can Subscribe: These bonds can be purchased by residents of countries that are members of the Financial Action Task Force (FATF). Also, regional and multilateral financial institutions where India holds membership can also subscribe.

• Minimum Maturity Period: For bonds issued up to the equivalent of 50 million US dollars in rupees per financial year, the minimum maturity is 3 years. For amounts exceeding 50 million US dollars, the minimum maturity extends to 5 years.

• Regulatory Requirements: The issuance of masala bonds must follow guidelines set by the Reserve Bank of India (RBI) as well as the securities regulator of the country where the bonds are listed.

• Use of Funds: Funds raised through masala bonds can be used for a variety of purposes, such as infrastructure projects, business growth, or repaying existing debt, all subject to regulatory approval.

• Listed on International Exchanges: These bonds are traded on foreign stock exchanges, making them accessible to a broad range of international investors.

• Currency Risk Lies with Investors: Since payments of principal and interest are made in rupees, the currency risk is carried by the buyer, protecting the issuer from exchange rate fluctuations.

• Cap on Issuance Amount: There is a limit on how much can be raised through the automatic route, set at INR 50 billion (or its equivalent) per financial year.

After learning about their key features, it’s helpful to know the different types of masala bonds.

Types of Masala Bonds

Masala bonds come in various types, each offering different features to suit different needs and preferences.

1. Short-term Masala Bonds

These bonds have a maturity period of less than three years. They are ideal if you’re looking for exposure to Indian rupee assets over a shorter duration. Short-term bonds usually involve lower risk but may offer relatively modest returns compared to longer-term options.

2. Long-term Masala Bonds

With a maturity period of more than three years, long-term masala bonds are often used to fund large projects like infrastructure development or business expansion. They typically offer higher returns but come with increased risk due to the longer time frame.

3. Fixed-rate Masala Bonds

Fixed-rate bonds carry an interest rate that is set at the time of issuance and remains unchanged throughout the bond’s life. This means you receive predictable interest payments, making them a good choice if you prefer stability and want to avoid fluctuations in income.

4. Floating-rate Masala Bonds

Floating-rate bonds have interest rates that adjust periodically, usually based on a benchmark rate. This means your returns can increase if market rates rise, but they may decrease if rates fall. These bonds are suited for those comfortable with some variability in their earnings.

Once the types are familiar, it becomes easier to see the value that masala bonds can bring.

Benefits of Masala Bonds

Masala bonds offer unique advantages for both investors and Indian entities looking to raise funds internationally. Below is how they can benefit you depending on your role:

Masala Bonds Benefits For Investors

• Easy Access to Indian Opportunities: You get a chance to explore Indian companies and infrastructure projects without needing to register as a Foreign Portfolio Investor (FPI) or enter the Indian domestic market directly.

• Higher Interest Rates: Masala bonds often provide more attractive interest rates compared to similar instruments in your home country, especially if you're from a region with lower yields.

• Diversified Portfolio: Adding masala bonds to your portfolio gives you access to international debt instruments tied to India’s growing economy, helping you diversify across regions and sectors.

• Exposure to India’s Growth: By holding masala bonds, you’re linked to India’s economic performance. If the Indian rupee strengthens, there’s potential for additional gains.

• Possible Tax Benefits: Depending on your country’s tax laws, you might enjoy lower tax rates or exemptions on the interest earned through these bonds.

• Support Rupee Globalisation: Your participation helps boost the presence and credibility of the Indian rupee in international financial markets.

Masala Bonds Benefits For Borrowers (Issuers)

• No Currency Exchange Risk: Since the bonds are rupee-denominated, you don’t have to worry about currency fluctuations. The exchange rate risk stays with the investor.

• Wider Funding Access: Masala bonds give you entry into global capital markets, helping you raise funds when local borrowing is limited or expensive.

• Cost-Effective Fundraising: If international demand is strong, you may be able to secure lower interest rates compared to domestic borrowing.

• Build Global Credibility: Gaining attention from international investors can boost confidence in your business and improve your chances of raising funds in the future.

• Boosts Rupee Acceptance: Every issuance contributes to increasing the global usage and acceptance of the Indian rupee, strengthening its international position.

• Simplified Process: Raising funds through masala bonds often requires less paperwork since investors don’t need FPI registration, making the process more efficient.

When you consider the advantages, it’s important to explore how various companies have used masala bonds effectively.

5 Notable Masala Bond Issues

Over the years, several major masala bond issues have helped build confidence in this rupee-denominated funding option. Here are some well-known examples that played a key role in popularizing masala bonds among Indian companies and government organizations:

1. International Finance Corporation (IFC)

The IFC, part of the World Bank Group, was the first to issue masala bonds in 2014.

• Its debut bond was a five-year issue worth ₹1,000 crore, which received an overwhelming response and was oversubscribed 13 times.

• This strong demand showed that global investors were open to rupee-denominated bonds.

2. Kerala Infrastructure Investment Fund Board (KIIFB)

KIIFB gained attention with its bond issue originally set at ₹1,500 crore, which was later increased to ₹3,000 crore due to high investor interest. 

• This became the largest-ever five-year masala bond issue and the biggest debut offering in this segment, offering an annual yield of 7.30%.

3. NTPC Limited

NTPC, India’s top energy company, issued the first green masala bond from a quasi-sovereign entity. 

• It raised ₹2,000 crore (around $300 million) with a 7.48% annual yield. 

• The funds were used for renewable energy projects, supporting India’s goal of reaching 175 GW of clean energy capacity.

4. Indian Railway Finance Corporation (IRFC)

IRFC, which finances projects for Indian Railways, has come out with multiple masala bond plans ranging from ₹1,000 crore to ₹2,000 crore. 

• These bonds typically have maturities between three to five years and are aimed at funding rail infrastructure and expansion.

5. Government of India (Proposed)

The Indian government has been planning its first masala bond issue, targeting ₹20,000 to ₹25,000 crore.

• The idea is to attract foreign portfolio investors and expand its borrowing base.

• This issue is expected to take place at GIFT City, helping boost India’s global financial presence.

Once you’re familiar with the major masala bond examples, it’s worth comparing them to other bond instruments you might come across internationally.

Masala Bonds vs. Other Global Bond Instruments

To understand where Masala Bonds stand among international debt instruments, here’s a straightforward comparison with other popular foreign currency bonds. This highlights how Masala Bonds uniquely benefit both Indian issuers and international investors:

You’ve seen how masala bonds compare to other instruments, but like any financial tool, they come with their own set of risks worth considering.

Risks of Masala Bonds

While Masala Bonds offer several benefits, it’s important to be aware of the potential risks involved, especially from an investor’s perspective. Here are the key risks:

• Currency Risk: Since these bonds are in Indian rupees, if the rupee loses value compared to your home currency, the returns you get could be lower when converted back.

• Liquidity Risk: Masala Bonds might not be as easy to buy or sell quickly compared to bonds in bigger markets. This could make it harder for you to sell your bonds without affecting their price.

• Regulatory Risk: The companies issuing these bonds must follow rules set by India and other countries. Changes in these rules can sometimes affect how well your bond performs.

• Credit Risk: There is a chance the issuer might face financial trouble and may not be able to pay back the interest or principal on time. This could affect the money you get back.

• Interest Rate Risk: If interest rates rise in India or internationally, the value of your bond might drop because new bonds may offer better rates.

• Market Risk: The overall market and investor feelings towards Indian assets can affect the bond’s value. If confidence falls, the price of the bond could decrease.

Conclusion

Masala bonds serve as a strategic tool for Indian companies to raise funds from international markets while offering attractive returns to global investors through rupee-denominated debt. Their ability to provide higher yields makes them appealing for those seeking exposure to India’s economy without currency risk. 

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Disclaimer

The information provided in this blog is for educational and informational purposes only. It does not constitute financial advice or a recommendation to buy, sell, or hold any financial instruments, including masala bonds or any other securities. Always conduct your own research or consult with a qualified financial professional before making any financial decisions. Past performance is not indicative of future results.