Introduction to the Masala Bonds: Benefits, Features & Limitations

10 min read • Updated 25 September 2023
Written by Team Wint Wealth
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Masala Bonds serve as a financial instrument through which Indian entities can raise money from overseas markets in the local currency, the Indian Rupee. These bonds are a gateway for investors seeking exposure to Indian assets, thus contributing to the diversification of funding sources for issuers.

Through vivid examples and detailed exploration, the article sheds light on how these bonds facilitate the flow of funds and the pivotal role they play in currency risk management. Join us as we delve into the fascinating world of Masala Bonds and their multifaceted utility.

What are Masala Bonds?

Masala bonds are rupee-denominated bonds that are issued by Indian entities but outside India. They work just like any other normal bond, but can only be issued outside India. The first masala bond was issued in 2014 by the International Finance Corporation to fund an infrastructure project in India.

What’s the unique part?

The money raised is in Indian currency.  The first masala bond was issued in 2014 by the International Finance Corporation to fund an infrastructure project in India. 

So, how do these bonds work?

Let’s say there’s a company called Pizza Ltd India. which wants to raise an amount of Rs. 4000 crores. Now Pizza Ltd India. says they have already raised a significant amount of money from Indian investors, so they want to issue these bonds overseas. 

And hence, they list their bonds on the London Stock Exchange. 

Now, these bonds are rupee-denominated bonds, which means that the debt will be raised in Indian currency. 

Therefore, if Pizza Ltd India. wants to issue Rs. 4000 crores, it will raise a sum which is equal to Rs. 4000 crores in Indian currency, but, from foreign investors. 

Now, you must be asking how they can repay their investors if the currency is different?

Simple, suppose after a few years they need to repay Rs. 4,200 crores to their investors. At that point of time, they will repay an amount that is equivalent to Rs. 4,200 crores, but in pounds (because it is listed on London Stock Exchange). 

Features of Masala Bonds

Masala Bonds have several distinctive characteristics that make them a desirable financial instrument:

Currency: Masala Bonds are issued in foreign currencies but have an Indian Rupee (INR) par value. This reduces the currency risk for Indian issuers.

Issuers: To raise money from overseas investors, these bonds may be issued by Indian corporations, financial institutions, governmental bodies, and infrastructure trusts.

Listing: Masala Bonds are typically listed on worldwide exchanges, making a wide range of investors possible.

Tenure: Their variable maturities, typically 3 to 20 years, give issuers and investors flexibility.

Interest Rates: To offset the risk of exchange rate fluctuations, bonds typically offer attractive interest rates that are frequently greater than those offered in the investors’ home countries.

Taxation: Masala Bonds are popular with overseas investors because of their favourable tax treatment for interest income.

Regulation Compliance: The Reserve Bank of India (RBI) and the market regulator of the nation where masala bonds are listed have regulatory frameworks that masala bond issuers must follow.

Use of Proceeds: Subject to regulatory constraints, the money raised through these bonds may be put to various uses, such as infrastructure improvement, company growth, and debt refinancing.

Currency Risk: Although the issuer is protected from currency risk, investors are nonetheless subject to it since the investment and returns are made in Indian Rupees.

Accessibility: They give Indian businesses access to international finance markets, expanding their pool of potential investors and funding sources.

Characteristics of Masala Bonds

Here are the various characteristics of masala bonds:

Rupee-Denominated: These bonds are issued outside of India but are priced in Indian Rupees rather than the nation’s local currency where they were printed.

Diverse Use: In accordance with regulatory guidelines, the money obtained through Masala Bonds may be utilised for several things, such as infrastructure development, corporate expansion, and debt refinancing.

Compliance with Regulations: The Reserve Bank of India (RBI) and the securities market regulator of the listed countries have set forth rules and regulations that must be followed when issuing Masala Bonds.

Enhanced Liquidity: Masala Bonds can increase liquidity due to their attractive qualities and worldwide listing.

Attractive Interest Rates: Masala Bonds frequently provide higher interest rates compared to bonds in the investor’s native country to entice foreign investors and offset currency risk.

International Listing: Masala Bonds are frequently offered on international stock exchanges, enabling more investors to purchase them.

Variable Maturity Periods: These bonds can have a variety of maturities, typically starting at 3 years, giving the issuer and the investor flexibility.

Tax advantages: Foreign investors pay a lower tax rate on the interest they get on Masala Bonds.

Capital Access Globally: By issuing Masala Bonds, Indian firms can gain access to finance on the international market, expanding their funding sources and investor base.

Investor-Borne Currency Risk: The investor is responsible for this risk. The investor suffers a loss if the value of the Indian Rupee falls in relation to their home currency.

Where Can the Proceeds from these Bonds be Used?

In accordance with the rules established by the Reserve Bank of India (RBI), the revenues from masala bonds can be used in a variety of industries and for a variety of objectives. Here are some potential uses for the money raised by masala bonds:

Business Expansion: Businesses can utilise the money to grow by increasing manufacturing capacity, breaking into new markets, or diversifying the types of goods or services they offer.

Real estate: As long as it complies with regulatory requirements, the funds may be used for real estate development, except the purchase of land.

Environment-Friendly Projects: Some Masala Bonds are issued expressly for financing environmentally friendly projects, like the development of renewable energy sources, the construction of green structures, and pollution prevention programmes.

Capital Expenditure: To increase the overall productivity and efficiency of the company, the funds may be used for capital expenditures such as the purchase of machinery, equipment, and technological improvements.

Infrastructure Development: Masala Bond revenues mostly finance Indian infrastructure projects. This aids in constructing vital infrastructure, including highways, bridges, power plants, and urban planning initiatives.

Corporate Objectives: Subject to regulatory permission, the proceeds may also be utilised for general corporate objectives, ranging from various endeavours geared towards supporting the overall growth and development of the issuing entity.

Existing Debt Refinancing: Organisations may use the funds collected to restructure their existing debt, maybe obtaining a more advantageous term or reducing their overall borrowing costs.

Working Capital Needs: The funds can cover a business’s ongoing operating costs, promoting efficient business operations.

Benefits of Masala Bonds

Masala Bonds

But why will a company issue masala bonds and why will foreign investors invest in them? What’s in it for the lenders and borrowers?

Let’s find out.

Benefits For Investors:

  1. Economic boost
    Masala bonds take the Indian debt market which is definitely a boost for the economy and is a platform that can even generate more foreign direct investments in India. Plus, they sound so cool!

  2. Tax Exemptions
    Yeah, you heard it right! Capital gains earned through rupee denominations are exempted from tax. That sounds like a pretty good reason to me already
  3. If the  Rupee Appreciates!
    If the value of the rupee appreciates by the end of the tenure, then it’s a natural win-win situation for the investor.

Benefits for Borrowers:

  1. Diversified Funding Sources: Borrowers can diversify their sources of debt financing, reducing reliance on domestic markets and potentially accessing capital at more favourable terms.
  2. Currency Risk: The borrowers issue Masala Bonds in Indian Rupees, which means the currency risk lies with the investors and not with the issuing entity, potentially making it a more attractive financing option.
  3. Brand Visibility: Issuing bonds in international markets can enhance a company’s brand visibility and credibility, fostering global investor relations and potentially leading to more investment opportunities.

Benefits for India:

  1. Foreign Investment Inflow: Masala Bonds facilitate the inflow of foreign investment into India, strengthening the Indian economy and supporting the financing needs of Indian companies.
  2. Infrastructure Development: The proceeds from these bonds are often used for infrastructure development, which is pivotal for the economic growth and development of the country.
  3. Strengthening of the Indian Rupee: By attracting foreign investment through Masala Bonds, there is an increased demand for the Indian Rupee, which can potentially lead to the strengthening of the currency, thereby having a positive impact on the economy.

Who Can Invest in Masala Bonds?

The following are the ones that can typically invest in Masala Bonds:

Institutional Investors from Abroad: Also known as FIIs, these entities are registered outside India and actively participate in the investment of Masala bonds. 

Global Funds: Global funds such as hedge funds and other internationally recognised mutual funds, along with sovereign wealth funds focusing on emerging markets such as the Indian markets, actively invest in masala bonds. 

HNIs: High Net-Worth Individuals that look to diversify their portfolio and wealth concentration invest in masala bonds. 

Cross-national Organizations: Organizations such as ADB and IFC can invest in Masala bonds to support economic growth in India.

Foreign Banking, Insurance and Funds: Foreign Banks, Insurance banks and pension funds are allowed to invest in masala bonds to diversify investments.

Are There any Limitations?

The following can be considered limitations of masala bonds

1. The Money Can’t be Used for Everything

RBI regulates bonds and RBI restricts the money raised through these funds to be used only in certain fields, like housing projects and for the development of townships. 

2. Relatively Riskier

Financing through masala bonds, is ofcourse riskier, because you are raising money from a foreign market, which can include currency fluctuations, emergency financial crisis etc.

For example, suppose a company invests in an emerging market. Usually, emerging markets are more volatile and they are prone to political fluctuations as well. Which may not be an ideal situation, would it?

3. Restrictions by RBI

Every sector has a boss and the boss of the Indian financial sector is RBI, the central bank of India!

RBI restricts the usage of masala bonds in certain sectors, like real estate activities that do not include the development of a township, buying land or use the proceeds to invest in the equity market. 

And no prizes for guessing, If companies do not adhere to these laws, they will be sued. 

Significant Masala Bond Issuances Over the years

Company Amount Year
The International Finance Corporation1000 crores2014
Indian Renewable Energy Development Agency (IREDA19502017
Kerala Infrastructure Investment Fund Board (KIIFB)2500 crores2019
HDFC 1000 crores2019

Whether it be in the kitchen or the market, masala bonds add a unique flavour. These bonds are open to residents who are part of the Financial Action Task Force and they can be issued by government and private entities. 


In wrapping up, Masala Bonds serve as a distinctive financial instrument, enabling companies to raise funds from international markets in Indian Rupees. These bonds are an attractive investment avenue for foreign investors, offering a taste of the Indian market while diversifying their portfolios. For India, they bring in foreign investment, bolstering the economy.

Whether you’re an investor eyeing global opportunities or just intrigued by international finance, Masala Bonds spice up the financial landscape with opportunities and benefits for both borrowers and the Indian economy. Keep an eye on them; they might just be the zest your investment portfolio needs!

  • Why is it called Masala bonds?
  • It is called Masala Bonds because "Masala" represents Indian spices, symbolizing the Indian origin of these bonds.
  • What is the maturity period of Masala bonds?
  • The maturity period of Masala Bonds is typically 3 to 5 years.
  • Who all can issue Masala bonds?
  • Indian corporations, government entities, and financial institutions can issue Masala Bonds.
  • What is the most popular market for Masala bonds?
  • The London Stock Exchange is the most popular market for Masala Bonds.
  • Who issued the first masala bond in india?
  • The International Finance Corporation (IFC) issued the first Masala Bond in India.

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