The international bond market presents a compelling opportunity for various entities seeking to raise funds for specific foreign projects. Firstly, the international bond market provides access to a potentially vast and diverse investor base, expanding the pool of potential funding sources. This broader reach can enhance the likelihood of securing financing for projects that may have a limited investor base in domestic markets. Additionally, tapping into the international bond market can help finance foreign ventures more efficiently by reducing the cost of financing. This can be particularly advantageous for organizations with global ambitions, as it enables them to access funds at potentially lower interest rates compared to domestic borrowing options. Innovative instruments constantly emerge to cater to such diverse needs of investors and issuers in the ever-evolving world of finance. One such spicy addition to the bond market that has gained significant traction in recent years is the Masala Bond. This article aims to provide a comprehensive overview of what is masala bond, exploring their origin, characteristics, benefits and their impact on the financial landscape.
In 2013, the global financial markets experienced a significant event known as the “Taper Tantrum.” This occurrence was triggered by the U.S. Federal Reserve’s announcement of scaling back its bond-buying program (QE), causing a massive flight of investors from emerging markets. India, being one of the affected countries, witnessed a considerable outflow of foreign capital, resulting in rupee instability and pressure on its foreign exchange reserves. In addition to this, Indian corporations faced a massive hurdle when raising foreign capital through ECB route which imposed strict regulations and numerous restrictions. In order to tackle this challenging situation, India introduced a pioneering financial instrument known as “Masala Bonds,” effectively addressing two objectives and playing a vital role in drawing capital back to its domestic market.
Overseas Rupee-denominated bonds, commonly referred to as “Masala Bonds,” are debt instruments issued by Indian entities in foreign markets with the objective of raising capital. Masala bonds are constructed on a principle, whereby they are denominated in Indian Rupees but settled in US$. For example, if a bond has a coupon of 10%, on the day of coupon payment the 10% of INR Notional is calculated and converted into US$ and paid to the investor. The same method is used for principal repayment. This arrangement allows foreign investors to invest in the Indian market taking a constructive view on INR currency while earning interest rate from the bond. The notion of foreign bonds enjoys significant popularity within the realm of the global bond market. Some examples of foreign bonds are:
| Bond Type | Definition |
| Yankee Bond | A US dollar-denominated bond issued by a foreign entity in the United States. |
| Samurai Bond | A yen-denominated bond issued by a non-Japanese entity in the Japanese market. |
| Maple Bonds | Bonds denominated in Canadian dollars that are issued by non-Canadian entities within the Canadian market. |
| Kangaroo Bonds | Australian dollar-denominated bonds issued by non-Australian entities in the Australian market. |
| Baklava Bonds | Turkish lira-denominated bonds issued by non-Turkish entities in the Turkish market. |
| Matador Bonds | Peseta-denominated bonds issued by non-Spanish entities in the Spanish market. |
| Panda Bonds | Yuan-denominated bonds issued by non-Chinese entities in the Chinese market. |
Masala Bonds are named to reflect their Indian origin, adding a cultural touch to the financial instrument. “Masala” stands for a blend of spices in Hindi, symbolizing the mixture of opportunities and flavors they bring to the investment landscape. These bonds allow Indian entities to raise funds in rupees from international markets without exposing themselves to the risk of currency fluctuation. By evoking the richness and variety of Indian spices, the name “Masala” captures the essence of these bonds’ unique characteristics in the global financial market, combining the local economic spirit with international investment appeal.
Masala Bonds provide a significant advantage to issuers by mitigating the currency exchange risk associated with international borrowing. Unlike traditional foreign currency-denominated bonds, where the issuer must bear the risk of currency fluctuations, Masala Bonds are denominated in Indian Rupees but settled in foreign currency (usually US Dollars). This arrangement means that while investors accept the currency risk, the bond issuers are not liable for losses arising from rupee depreciation. Consequently, Indian companies can raise funds internationally without worrying about the exchange rates between the rupee and other currencies, making it a financially prudent option for securing overseas capital.
Masala bonds have several unique characteristics that set them apart from other types of bonds:
Masala bonds offer several benefits for both issuers and investors. Here are the key benefits of Masala bonds:
| Year | Event |
| 2014 | The International Finance Corporation (IFC) issues the first-ever 10-year, 10 billion Indian rupee Masala bonds. |
| 2015 | The IFC issues the inaugural Green Masala bonds, raising ₹3.15 billion for private sector climate change investments. |
| 2016 | HDFC becomes the first Indian company to issue Masala bonds, raising ₹3000 crore. |
| 2016 | NTPC issues the first-ever corporate green Masala bonds, valued at ₹2000 crore. |
| 2019 | The Kerala Infrastructure Investment Fund Board (KIIFB) becomes the first sub-sovereign entity in India to access the international bond market with an issuance of ₹2,150 crore on the London Stock Exchange. |
| 2021 | Asian Development Bank listed 10-year masala bonds worth ₹300 crore |
Masala bonds are a unique and innovative way for Indian companies to raise capital from international markets. The cumulative issuance of Masala bonds reached approximately $20 billion in 2021. While they have some limitations, they offer many benefits for both issuers and investors. As the Indian economy continues to grow, it’s likely that we will see more and more companies turning to masala bonds as a way to finance their growth. To know more such delicious content on bonds log on to IndiaBonds.
A: Quantitative easing (QE) is a monetary policy tool used by central banks to stimulate the economy. It involves the central bank purchasing government securities or other financial assets from commercial banks and other financial institutions. This injection of money into the economy aims to increase lending, boost economic activity and encourage investment.
Taper tantrums, on the other hand, refer to market reactions characterized by sudden and volatile price movements following hints or announcements by central banks about reducing or tapering their quantitative easing programs. These reactions occur because market participants become concerned that the withdrawal of the central bank’s support could lead to higher interest rates, reduced liquidity, and potential disruptions in financial markets.
A: A maharaja bond is an onshore rupee-denominated debt instrument issued by IFC in 2014. This was followed by the issuance of masala bonds. Listed in the NSE, the issue raised 600 crores from both domestic and foreign investors to support the country’s domestic capital markets.
A: Masala bonds are a type of debt instrument issued by Indian entities in the international market but denominated in Indian rupees (INR), as opposed to the local currency of the foreign market. They are named “masala” to reflect the Indian origin and cultural identity of the bond.
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