What is Masala Bond?

The hottest topic today in the Finance business is “ Masala Bonds.”

Lets just understand what is Masala Bonds and what does it meant to be ?

Bonds which are not issued in India, but outside it and denominated in Indian rupees and not in the local currency where it has been issued.


Going to the literal meaning of the word Masala , it simply means “Spices” in India. The idea behind using the word ‘Masala’ was to bring up the culture and cuisine of India. The IFC (International Finance Corporation) purposely named it Masala bonds.


In Dollar bonds the borrower takes the risk of currency changes , whereas, in Masala bond it is the investors , that is the people who deposits their money under the bond bears the risk.

masala bond
masala bond


World Bank  with the support of IFC approved first Masala Bond in the year 2014, November. In this bond both World Bank and IFC raised the bond upto 1,000 crore so as to fund the infrastructure plan in India. On seeing the positive report of First Masala Bond , IFC in August 2015 , for the first time issued Green Masala Bonds and raised the fund to 3.15 Billion , which was supposed to be used for the private sector investments which are related to climate changes in India.

HDFC became the first company in India to raise the Masala bond in July, 2016. It raised 3,000 Crore rupees for Masala Bonds. Similarly in August 2016, NTPC the private sector unit issued its first Green Masala Bond for  2,000 Crore Rupees. Delhi International Airport Pvt Ltd (DIAL) also planning to issue masala bond to raise fund.


Masala Bond is basically a term which empowers the Indian entities to raise their fund in Rupees and not in Foreign currency. Which can also means rolling Indian currency wherever you go. The Bond is designated for Indian Rupees which is issued away from homeland in the capital markets. This bond is an attempt to protect the bond issuers from currency dangers. It transfers the risk from borrowers to the investors. It says that all the risk shall be borne by the investors which means if in case at the time of paying back the Bond coupons and maturity amount , if there is decrease in the value of Indian rupees , then in such a situation RBI will realize marginal savings. This is good method to internationalize the Indian currency.

For the success of this Bond stability in Indian currency value is very much important. Now, it is very clear that investors caries the currency risks with them , then can make a demand for currency risk premium on their coupon and if this happens the borrowing costs will become little higher.

In case if one considers the currency it may still be cheaper. Although the bonds are to be raised in Indian currency but it will be considered as a part of foreign borrowing from Indian corporates so it will follow the rule , regulation  and terms & conditions of RBI. The highest amount which Companies can raise upto $750 million per year through Masala Bonds.

Pricing  of Masala Bonds :

Two things are required for the success of such bonds , they are :

  1. Coupon rate
  2. Liquidity of Indian Currency.

Indian has been rated BBB by the global rating agencies , which is a cut above junk rating. Self-governing ratings will influence the ratings of this bond. For example,

HDFC has recently borrowed , through a three year bond in the domestic market at the rate of  8.35%. HDFC has expected to fix the coupon rate lower than the domestic rate for Masala Bonds , that too for at least 10 basis points. Overseas investor have not yet decided their coupon rate for Masala Bonds. Investors of these bonds are expecting higher coupon from the issuers so as to make the bonds costlier for the Indian Borrowers. This is reason why Masala Bond is holding back. Also, if US Fed increases their interest rate than hardly people will be interested in Masala bond, It will make it look less interesting.

After many convincing process , Masala bond is likely to $5 Billion in another 2 years. British Government wants to make London as Global hub for offshore rupee financing , therefore it is courting Masala Bond issuers. If the concept of Masala Bond succeeds then it will pullover the interest of all the overseas investors confidence in Indian currency. For this it is very necessary that Indian Corporates should successfully issue these bonds. This would imply faith in the country`s macroeconomic fundamentals and role of Central Bank in managing currency.

Present Status :

It is sad to say that even after the launch of Masala Bonds in 2013, Indian Corporate sector borrowed around $ Billion in the first month of 2015 through external commercial borrowing (ECB) route. Not a single bond was through Foreign Currency Commercial bond (FCCB) route .

These bonds are likely to mature between 3 to 10 years. Availing ECB route creates a major danger which is currency risk. Indian Banks have refused to refinance these corporate units.

Few years back CRISIL  made a study which found that outstanding foreign loans of Indian Corporate at over $200 Billion. More sticking was that many of such foreign currency exposures was unavoidable.

In order to manage currency risks what corporate does is it makes currency swaps and similar financial instruments. If the Indian Currency goes down then the currency risks becomes larger and this may set off the possible default. Earlier Indian Firms were able to borrow money only if the lenders we willing to give them money. These foreign lenders would decide this on the basis of liquidity conditions of US. Such option may not now be available to the Indian Borrowers as US Fed has lowered the quantitative easing. After the reduction in Chinese currency and Indian currency , the burden of foreign currency borrowing is felt more now.

It has been seen from the records that Indian firms especially Financial Institutions have issued USD denominated currency bonds for around $3 billion , that too only in the last 6 months of the year 2015. We can easily point out that the main motive of issuing these bonds is very low coupons. But , the impact of falling value of rupees may overcome low coupon rates.

Here is the Table to show you the Issue of US Dollar Bonds:

Issuer NameCpnIssue DateMaturityAmt ($ Million)
IDBI Bank Ltd/DIFC Dubai4.2530/11/201530/11/2020350
Videocon Industries Ltd4.3030/12/201531/12/202097.2
ICICI Bank Ltd/Dubai3.1312/08/201512/08/2020500
Adani Ports & Special Economic Zone Ltd3.5029/07/201529/07/2020650
Reliance Industries Ltd2.5126/08/201515/01/2026225
Prakash Industries Ltd5.3530/09/201501/10/202017.85
Adani Ports & Special Economic Zone Ltd3.5029/07/201529/07/2020650
Export-Import Bank Of India/London2.1306/11/201506/11/202042.8
ICICI Bank UK PLC1.4528/09/201528/03/201750
ICICI Bank UK PLC1.1030/12/201529/06/201612
Axis Bank Ltd/Dubai1.6329/12/201529/12/20179
ICICI Bank Ltd/Dubai1.5604/12/201504/12/2018100
Axis Bank/Hong Kong0.0027/07/201527/01/201620
ICICI Bank UK PLC1.1016/12/201516/06/201610
ICICI Bank UK PLC1.0522/12/201527/06/201610
ICICI Bank UK PLC1.7729/09/201529/09/20185
ICICI Bank UK PLC1.4219/11/201519/11/20185
ICICI Bank Ltd/Hong Kong0.8524/09/201524/03/201620
ICICI Bank UK PLC1.7729/09/201529/09/20185
ICICI Bank UK PLC0.9804/09/201506/09/201610
Total   2788.85

Source: Bloomberg

This is the reason why Indian Corporate sector was looking for an option to raise money  in foreign currency  without troubling currency risk .

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