The bonds that are sold by Indian securities and firms in international markets, are called masala bonds. The primary objective of masala bonds are to raise funds for infrastructure projects, to promote growth of a company and in general to globalise the Indian rupee.

The concept of Masala bonds were first introduced by the International Finance Corporation in 2014. These bonds are issued in the Indian currency which means, if the rate of the rupee fall, the investor bears the loss. Masala Bonds can be issued by both private and public entities and usually attract foreign investors who want to invest in assets in India. Any resident of that country can subscribe to these bonds which are members of the Financial Action Task Force.

The Reserve Bank of India has put certain regulations and guidelines for Masala bonds such as the maturity period of bonds having a rupee value equivalent to 50 million dollars is three years, while, for bonds having a rupee value above 50 million dollars is five years. These bonds are eligible to be issued by any corporate and Indian banks overseas. However, the money raised via these bonds cannot be invested on real-estate activities and the capital markets.

HDFC, NTPC, Indiabulls Housing Finance, are a few Indian entities who have raised funds using Masala Bonds.

Now that we have discussed what Masala Bonds are, it is important to understand why they are useful.

These type of bonds have helped India in getting foreign investors. Foreign Institutional Investors or Foreign Portfolio investors who want to tap into the domestic market can opt to do so through masala bonds. Also, the cost of funds is cheaper and is issued below 7% interest rate for borrowers. The companies who issue this kind of bonds do not have to worry about the depreciation in the rupee as the loss is issued by the investor.

ECB Policy

The Reserve Bank of India permitted Indian corporates to issue Masala bonds in the overseas market within the overarching External Commercial Borrowing policy in Sep 2015.

Masala bonds should have a minimum maturity of 3 years for funds raised the equivalent of $50 million in Indian rupees and a minimum maturity of 5 years for funds raised above $50 million.

The amount raised through masala bonds is limited to $750 million annually. Companies that need to raise funds above $750 million must seek RBI's approval.

Any Indian company can issue masala bonds. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), too, can. Masala bonds can be held privately or listed on the exchanges of the host foreign country, depending on the host country's rules.

The External Commercial Borrowing Framework, 2015, also details the investors for such Masala bonds. It says:

That a resident of a country may subscribe to Masala bonds.

That is a member of the Financial Action Task Force (FATF) or a regional body modelled after the FATF.

Issuance So Far

In 2014, the IFC was the first to issue masala bonds to raise ₹10 billion to fund infrastructure projects in India. The IFC raised the Masala bond with a maturity of three, five, seven, 10, and 15 years and increased the program to US $3 billion in 2016.

In Aug 2015, the IFC, for the first time, also issued green masala bonds worth ₹31.50 billion for investments in fourteen private sector development projects.

One of Asia's oldest multilateral development banks, the Asian Development Bank has also issued masala bonds regularly since 2014 with maturities of four, five, and 10 years.

In July 2016, HDFC Ltd became the first Indian company to issue masala bonds to raise funds.

Other noteworthy Indian corporates that have raised funds through masala bonds are Yes Bank, NTPC, IRFC, and ICICI Bank. Masala Bonds have been issued in various global financial markets, such as London, Singapore, and Hong Kong.

As per RBI data, a total of ₹1.7 trillion worth of masala bonds were issued between 2015 and 2021. This increase in interest from investors was driven by the low-interest rate globally and attractive yields offered by Indian corporates.

In the initial phase, there was a good take-off of the Masala bonds; however, the issuance momentum dropped after the COVID-19 pandemic, as market conditions became more volatile, and investors became more risk-averse.

Also, the rupee-denominated bond market is relatively minor compared to the dim sum bonds issued by China. The Dim Sum bond issuance in 2014 was US $54.9 billion, and post-COVID-19 pandemic, the renminbi-denominated bonds have fallen back to US $12 billion in 2021, as per media reports.

Overall, the Masala bonds, or rupee-denominated bonds, have provided Indian companies with additional funding and helped foreign investors diversify their portfolios in the Indian debt market. These helped issuers minimise currency risks.