Masala Bonds | 06 Dec 2025

Source: TH 

Why in News? 

The Enforcement Directorate (ED) has issued show-cause notices to the Kerala Chief Minister, and the former Finance Minister for allegedly violating Foreign Exchange Management Act (FEMA) and the directions of the Reserve Bank of India (RBI) over the issue of Masala Bonds.

What are Masala Bonds? 

  • About: Masala Bonds are the rupee-denominated bonds issued to overseas buyers for raising money by the Indian corporates. The price of the bond is denominated in Indian currency. 
    • The currency exchange risk is borne by the foreign investor, not the Indian issuer. This protects Indian borrowers from rupee depreciation volatility. 
  • Origin & Objective: The term was introduced by the International Finance Corporation (IFC) to reflect India's cultural identity (masala meaning spice blend). 
    • Its primary objective is to help Indian entities raise foreign capital without forex risk and to internationalize the Indian Rupee. 
  • Regulations: Governed by RBI guidelines under the External Commercial Borrowing (ECB) framework and Securities and Exchange Board of India (SEBI) norms. 
  • Listing: Typically listed on major international exchanges like the London Stock Exchange (LSE) or Singapore Exchange to attract global investors. 
    • The first Masala Bond was issued in November 2014 by the IFC on the London Stock Exchange. 
  • Maturity Norms: Under RBI guidelines, the minimum maturity is 3 years for bonds raising up to USD 50 million equivalent and 5 years for amounts above that threshold. 
  • Eligible Investors and Issuers: These bonds target qualified foreign investors (e.g., sovereign wealth funds, global pension funds, and insurers) who can take on rupee-denominated risk. 
    • Eligible Issuers: Indian corporations, NBFCs, and government-affiliated entities. 
  • Permitted & Restricted End-Uses of Funds: 
    • Permitted Uses: Refinancing existing rupee-denominated debt, Funding infrastructure, affordable housing, and integrated townships, and Meeting corporate working capital requirements. 
    • Restricted Uses: Real estate (except approved housing projects), Activities barred under FDI guidelines, Investment in domestic capital/equity markets, Land purchase or on-lending for prohibited activities. 

Other Similar Types of Bonds 

  • Dim Sum Bonds (China): Renminbi (RMB)-denominated bonds issued outside mainland China (primarily in Hong Kong).  
    • Panda Bonds (RMB-denominated but issued within mainland China by foreign entities). 
  • Samurai Bond (Japan): Yen-denominated bonds issued in Japan by foreign entities. 
  • Yankee Bonds (United States): US Dollar-denominated bonds issued in the US by foreign governments or corporations. 
  • Kangaroo Bonds (Australia): Foreign bond issued in the Australian market by non-Australian firms and is denominated in Australian dollars (AUD). 

Frequently Asked Questions (FAQs)

Q. What are Masala Bonds? 
Masala Bonds are rupee-denominated offshore debt instruments where currency risk is borne by foreign investors, not Indian issuers. 

Q. Why did IFC introduce the term Masala Bonds? 
IFC coined the term in 2014 to reflect India’s cultural identity and promote rupee-denominated fundraising abroad. 

Q. Why are Masala Bonds important for India? 
They help Indian companies access foreign capital without exposing themselves to exchange-rate fluctuations, and they promote global demand for the Indian rupee, supporting India’s financial integration. 

Summary

  • The Enforcement Directorate (ED) has initiated action against Kerala's Chief Minister over alleged FEMA violations related to the state's issuance of Masala Bonds, bringing the instrument under legal and political scrutiny. 
  • Masala Bonds are offshore rupee-denominated debt tools that transfer currency risk to foreign investors, designed to attract foreign capital and internationalize the rupee. 
  • They are strictly regulated by the RBI's ECB framework. 
  • Eligible issuers (corporations/NBFCs), and permitted end-uses (infrastructure, refinancing debt). 

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Q. Indian Government Bond Yields are influenced by which of the following? (2021)

  1. Actions of the United States Federal Reserve 
  2. Actions of the Reserve Bank of India 
  3. Inflation and short-term interest rates 

Select the correct answer using the code given below. 

(a) 1 and 2 only 

(b) 2 only  

(c) 3 only 

(d) 1, 2 and 3 

Ans: (d) 

Q. With reference to ‘IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/ are correct? (2016)

  1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank. 
  2. They are the rupee-denominated bonds and are a source of debt financing for the public and private sector. 

Select the correct answer using the code given below: 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2 

Ans: (c)