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Understanding Masala Bonds: Key Benefits, Features and How to Invest Smartly

Imagine an Indian company planning a major global expansion. To raise the necessary funds from international investors without being exposed to currency fluctuations, a reliable solution is required. This is where Masala Bonds come into the picture.

To understand the significance of Masala Bonds, let's first understand how bonds work. Bonds are financial instruments through which companies or governments borrow money from investors. In return, they commit to paying regular interest and repaying the principal at the end of a specified term. Each bond comes with defined terms such as the coupon rate (interest rate), tenure (duration), and payment frequency.

What sets Masala Bonds apart is their structure—they are issued in overseas markets by Indian entities. However, they are denominated in Indian Rupees, offering a rare combination of global reach and currency stability.

What Are Masala Bonds?

Masala Bonds are rupee-denominated bonds that Indian companies issue in foreign markets. Here’s the interesting part—unlike regular international bonds that are issued in foreign currencies, Masala Bonds are in Indian Rupees. So, who handles the currency risk? Not the Indian company, but the investor. That’s the big advantage for Indian companies—they can raise money globally without stressing over exchange rate ups and downs.

Think of it as inviting foreign investors to support Indian projects, but asking them to accept the possibility that the rupee’s value might change over time. This is especially helpful during times when currency markets are unpredictable, as the company’s repayment amount stays fixed in rupees.

Key Features of Masala Bonds

So, what exactly makes Masala Bonds stand out from the rest? Let’s break it down—who can issue them, who can invest, and how they actually work.

Who can Issue Them?

Both Indian private companies and government bodies can issue Masala Bonds. This helps them raise funds from foreign investors, expanding their reach beyond Indian markets.

Who can Invest?

Foreign investors from the Financial Action Task Force (FATF) member countries are eligible to invest in these bonds. That includes individuals, institutions, and even financial organisations from countries that follow international standards for fair and secure investing, like those under IOSCO (International Organisation of Securities Commissions). It also covers multilateral and regional financial institutions of which India is a member.

What’s the Maturity Period?

It depends on the size of the bond. For bonds up to USD 50 million, the maturity is usually 3 years. For larger amounts, it can go up to 5 years, giving investors more flexibility based on their goals.

What currency are they in?

Unlike most foreign bonds, Masala Bonds are issued in Indian Rupees (INR). That means the currency risk—if exchange rates change—is on the investor, not the issuer. This helps Indian companies manage their risks better.

What can the money be used for?

There are clear rules. The funds must be used for specific projects like infrastructure, affordable housing, refinancing rupee loans, or investing in non-convertible debentures. So, the money goes into areas that support India’s development.

Benefits of Masala Bonds

Masala Bonds aren’t just another investment product—they’re a smart way to blend safety, returns, and global exposure. Whether you’re an investor, an Indian company, or simply looking at the bigger economic picture, these bonds offer real, tangible benefits.

For Investors:

  • Steady, Attractive Returns: Coupon rates between 8% and 14%—often better than many developed markets for similar risk.
  • Tax Advantage: Capital gains from rupee appreciation are tax-free, which can enhance your overall earnings.
  • Simple Process: You don’t need to register as a Foreign Portfolio Investor (FPI), making it easier to invest.
  • Direct Access to India: Opportunity to invest in India's growing economy.

For Indian Companies:

  • Access to Global Capital: Masala Bonds help companies raise funds from international investors, easing pressure on domestic lenders.
  • Lower Currency Risk: Since bonds are issued in Indian Rupees, the currency risk sits with the investor, not the issuer.
  • Boost to Global Reputation: Issuing these bonds improves international visibility and builds trust with global investors.

For the Indian Economy:

  • Increased Foreign Investment: Foreign investment through Masala Bonds strengthens the rupee and boosts foreign reserves.
  • Growth in Infrastructure: Funds raised often go into big infrastructure projects, fueling long-term development.
  • Push for Rupee Globalisation: More international use of the Indian Rupee helps build its credibility as a global currency.

Masala Bonds bring together global investors, Indian businesses, and the national economy in a way that benefits everyone involved. For those looking to invest in bonds, they offer more than just steady returns—they act as a bridge to long-term growth, both personal and national.

Limitations of Masala Bonds

While Masala Bonds offer several benefits, it’s equally important to understand where they fall short. Like any investment, they come with a few conditions that investors and issuers should be mindful of.

1. Limited Fund Use

Companies can’t use the funds raised through Masala Bonds for just anything. Activities like buying land, investing in the stock market, or funding real estate projects are off-limits—unless they’ve received specific government approvals. For businesses looking for flexible funding, this can be a limitation.

2. Not for Everyone

Masala Bonds aren’t designed for everyday investors. They’re typically aimed at big players—sovereign wealth funds, hedge funds, institutional investors, and high-net-worth individuals. If you’re a retail investor hoping to invest directly, your options may be limited.

3. Forex Risk for Investors

Since masala bonds are issued in Indian Rupees, foreign investors carry the currency risk. If the rupee falls in value compared to their home currency, it can reduce their returns—even if the interest rate on the bond is high.

Masala Bonds are a promising option—but like all investments, they come with trade-offs. Knowing both the strengths and the limitations can help you make a smarter, more confident investment decision.

Types of Masala Bonds

Masala Bonds come in different forms to suit various investor needs:

  • Short-Term Masala Bonds: With maturities up to 3 years, these are ideal for investors seeking lower risk and quicker returns.
  • Long-Term Masala Bonds: Maturities beyond 3 years suit investors with longer-term goals and higher risk tolerance.
  • Fixed-Rate Masala Bonds: These offer a fixed coupon rate, such as 8% or 14%, providing predictable income.
  • Floating-Rate Masala Bonds: Interest rates change with market conditions, appealing to investors looking to benefit from rising rates.

Final Thoughts - Should You Invest in Masala Bonds?

Masala Bonds offer a unique way to earn steady returns while being part of India’s exciting growth journey. They combine the safety of fixed income with the potential of a growing economy, making them a strong option for thoughtful investors.

By understanding how Masala Bonds work—their features, benefits, and even the limitations—you can make smarter choices that align with your financial goals. They’re a great option if you’re looking to diversify beyond traditional investments and want a steady income stream. If you’re planning to invest in bonds, Masala Bonds offer a unique way to tap into India’s growth story with the added benefit of fixed returns.

Bondbazaar makes the whole process simple. With zero brokerage fees, real-time trading, and easy access to bond options, investing in Masala Bonds is now more convenient than ever.

Whether you're a seasoned investor or just getting started,Masala Bonds strike the right balance between risk and return.