Masala Bonds - Meaning, Benefits and Limitations

By : Neha Dhyani

Updated : Mar 4, 2022, 13:10

Masala bonds are debt instruments issued in rupee-domination in a foreign market by an Indian entity. They are bonds issued overseas to raise money, but in Indian currency, and not in dollars or any local currency. The primary aim of these bonds is to internationalize the Indian rupee, fund infrastructure projects outside of India, and boost internal growth through borrowings.

Special Facts About Masala Bonds

  • These are bonds floated outside of India to raise funds from overseas investors.
  • Only residents of countries that are members of the Financial Action Task Force (FATF) can apply for masala bonds.
  • The security market regulator of the country issuing these bonds must be a member of the International Organisation of Securities Commission.
  • Regional and multilateral financial institutions, of which India is a member, can subscribe to these bonds.
  • Both government and private entities can issue masala bonds.
  • As per RBI guidelines, the maturity period for masala bonds is three years raised to the rupee equivalent of50 a million dollars for one financial year.
  • These bonds are converted at market rate on the date of transaction settlement undertaken on the interest value of the bonds.

Benefits of Masala Bonds

  • It benefits the investors as it offers higher interest rates.
  • The borrowers get benefitted as it saves them from the risk of currency fluctuations.
  • There is tax exemption on the capital gains earned from these bonds.
  • The investors benefit if the rupee's value appreciates at the time of maturity.
  • It gives a great opportunity for Indian entities to issue these bonds to diversify their portfolio.
  • The reachability for masala bonds is very wide as they are sold in the secondary market.

Limitations of Masala Bonds

  • The reduction in rate cuts periodically by the RBI in masala bonds is becoming less appealing for the investors.
  • There are limitations regarding the capital funds raised through these bonds, as they cannot be used in every field and for every venture. The money can be used in certain fixed fields only.
  • The emerging markets are posing great risks on the fluctuation of currency rates. Investors are highly cautious in investing and floating money in masala bonds in such challenging market scenarios.
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FAQs on Masala Bonds

Q1. When was the first masala bond issued?

Ans: The first masala bond was issued in 2014 by the World Bank to fund an infrastructure project in India, and it raised1000 crore from it.

Q2. Why are these bonds called masala bonds?

Ans: Masala is an Indian word that means spices. The International Finance Corporation used this term to evoke the culture and cuisine of India.

Q3. Which is the first Indian company to issue masala bonds?

Ans: The first Indian company to issue masala bonds was HDFC. It raised3000 crores by issuing masala bonds in July 2016.

Q4. Where can the proceeds of the masala bonds be used?

Ans: The proceeds raised from masala bonds can be used for:

  • Refinancing of non-convertible debentures and rupee loan
  • For developing integrated townships and affordable housing projects
  • Providing working capital to corporates

Q5. Is it important for UPSC students to know about masala bonds?

Ans: Yes, studying masala bonds for UPSC students adds an advantage to their preparation and curriculum.