Masala Bonds: An Overview of India’s Rupee-Denominated Bonds

Masala Bonds are innovative financial instruments issued outside India by Indian entities in Indian Rupees (INR). These bonds are designed to attract foreign investors while promoting the internationalization of the Indian Rupee. Below is a detailed look at Masala Bonds, their objectives, characteristics, benefits, and limitations.

What are Masala Bonds?

Masala Bonds are debt securities issued overseas by Indian entities, denominated in Indian Rupees. These bonds allow Indian entities to raise funds globally while shielding themselves from currency exchange rate risks.

Key Objectives of Masala Bonds:

1. Infrastructure Development: Funding large-scale infrastructure projects in India.
2. Economic Growth: Boosting internal growth through borrowings.
3. Internationalization of the Indian Rupee: Expanding the global footprint of the Indian Rupee.

Investor Risk:

In the event of any currency depreciation, the investor bears the loss, not the borrower.

Historical Background:

• The first Masala Bonds were issued in 2014 by the World Bank to fund Indian infrastructure projects.
• The International Finance Corporation (IFC), a branch of the World Bank, issued a 10-year, INR 10 billion bond in November 2014 to mobilize international capital for India.

RBI Guidelines for Masala Bonds

The Reserve Bank of India (RBI) has set specific rules for issuing Masala Bonds:

• Eligible Issuers: Indian corporates and banks can issue Rupee-denominated bonds overseas.
• Prohibited Investments: Funds cannot be used for real estate activities (except for affordable housing and integrated townships) or capital market investments.
• Eligible Investors: Residents of FATF member countries and financial institutions where India holds membership.

Characteristics of Masala Bonds

1. Investors:

• Issued to residents of FATF member countries.
• Subscribed by regional and multilateral financial institutions with Indian membership.
• Investors interested in Indian assets but outside traditional FII/FPI routes.

2. Maturity Period:

• Bonds up to USD 50 million (INR equivalent) per year: Minimum maturity of 3 years.
• Bonds exceeding USD 50 million (INR equivalent) per year: Minimum maturity of 5 years.

3. Issuers:

• Leading Indian entities like HDFC, NTPC, and Indiabulls Housing Finance have successfully raised funds through Masala Bonds.

Benefits of Masala Bonds

Masala Bonds offer distinct advantages for both investors and issuers:

For Global Investors:

1. Access to Indian Markets: Provides an alternative investment route for those unable to invest directly via FPI or FII.
2. Simplified Documentation: Eliminates the need for FPI registration in India.

For Indian Borrowers:

1. Cost Efficiency: Funds can be raised at interest rates below 7%, making it a cost-effective financing option.
2. Currency Risk Mitigation: Issuers are protected from the risks of Rupee depreciation.
3. Leverage Low Global Interest Rates: Borrowing in currencies like USD, GBP, or Yen is made favorable due to low interest rates in these regions.
4. Promotes Rupee Internationalization: Familiarizes international investors with the Indian Rupee, boosting its global recognition.
5. Enhances Domestic Bond Market: Encourages competition, improving the domestic bond market’s development.

Limitations of Masala Bonds

While Masala Bonds offer significant benefits, there are certain challenges:

1. RBI Rate Cuts: Periodic rate cuts by RBI make these bonds less attractive to investors.
2. Restricted Usage of Funds: Raised funds cannot be invested in all sectors; restrictions apply to capital markets and certain real estate activities.
3. Currency Risk for Investors: The burden of currency depreciation is borne by the investors, making them cautious about emerging markets like India.
4. Sustainability Issues: According to Moody’s, maintaining financing via Masala Bonds could be challenging due to investor concerns over currency risks.

Masala Bonds: Key Facts

• The term “Masala Bonds” was coined by the International Finance Corporation (IFC), symbolizing India’s rich cultural heritage (Masala means spices in Hindi).
• The first-ever Masala Bond was issued in 2014 by IFC for funding Indian infrastructure projects.
• In February 2020, the Asian Development Bank (ADB) listed 10-year Masala Bonds worth ₹850 crore on India INX to support local currency investment.
• By 2020, a total of $5.5 billion worth of Masala Bonds had been issued globally.

Masala Bonds vs. Similar Bonds

1. Dim Sum Bonds: Rupee-denominated bonds issued in China.
2. Samurai Bonds: Foreign-currency-denominated bonds issued in Japan.

Conclusion

Masala Bonds have emerged as a powerful financial instrument for Indian entities to access global capital markets while promoting the Indian Rupee internationally. Despite limitations like currency risk for investors and restricted fund usage, the bonds have successfully fostered infrastructure growth and attracted international investors. By bridging global capital and local development, Masala Bonds symbolize India’s growing integration with the global economy.