When I’m asked to explain masala bonds, I start with the simplest definition: they are rupee-denominated bonds issued outside India by Indian entities. Coupons and principal are linked to INR, but the bonds are sold and settled in an overseas financial centre. The crucial twist is who bears currency risk. In a normal dollar bond, the Indian issuer borrows in USD and worries about the rupee weakening. In a masala bond, the investor takes that FX risk while the issuer’s liability remains in rupees. That single design choice changes the economics for both sides.
Here’s how it works in practice. Suppose a company issues a five-year masala bond at an 8.25% coupon linked to INR. Investors pay in the foreign market’s currency (usually USD or another hard currency), but the amount they receive every coupon date is converted from rupees at the then-prevailing exchange rate. If INR depreciates, the foreign investor’s dollar return falls; if INR appreciates, it rises. For the issuer, there is no currency mismatch on the balance sheet—future cash flows are in rupees, just as the company earns and spends at home.
That rupee liability is the first big benefit for Indian borrowers. I’ve seen companies with large domestic cash flows avoid costly hedging because masala bonds push FX volatility to the investor base that wants or can manage it. The second benefit is market access. Issuing offshore opens doors to global pension funds, EM debt managers, and impact investors who may not be set up to buy bonds in India directly. A wider investor pool can translate into larger deal sizes and better pricing than a crowded onshore window.
There’s also a signaling effect. An international listing builds visibility, diversifies the funding stack beyond banks and local NCDs, and can help issuers benchmark themselves against regional peers. For sectors such as infrastructure, renewable energy, or financials, that matters—especially when future rounds of funding depend on a stable, repeatable market presence.
Pricing is a little different from conventional dollar bonds. Investors think in three layers: the underlying INR yield curve for that tenor, a credit spread for the issuer’s strength and structure, and an expectation for INR volatility over the life of the bond. If the market expects moderate currency stability and likes the credit story, masala coupons can be competitive with domestic borrowing—without the headaches of rolling FX hedges. From my perspective, that combination is powerful for issuers planning multi-year projects where predictability beats the illusion of a slightly lower headline rate.
Of course, masala funding is not a magic wand. Offshore liquidity comes in waves; windows open when global risk appetite and the INR backdrop are supportive, then close quickly. Documentation and disclosure standards must meet international norms, which raises internal requirements on reporting and investor relations. There are also regulatory thresholds and listing rules to respect. And because foreign investors carry the currency risk, deals must be marketed with a clear FX narrative—what drives INR, how the business is insulated, and why the coupon fairly compensates for that risk.
For investors, the appeal is targeted India exposure in a familiar settlement environment. They can express a view on INR and earn yields typically higher than many developed-market bonds, while holding transparent, exchange-listed paper. The risk is the same coin flipped over: a sharp rupee depreciation can erode foreign-currency returns even if the issuer pays on time. That’s why many global funds pair masala bonds with currency hedges or treat them as part of a broader emerging-market allocation.
Stepping back, I see masala bonds as a strategic bridge between Indian borrowers and global capital. They let issuers raise rupee liabilities abroad, deepen their investor base, and reduce FX mismatches—advantages that compound over time. For a growing economy with expanding infrastructure needs, that toolbox matters. Used thoughtfully alongside domestic bonds in India, bank loans, and rupee NCDs, masala bonds help Indian companies fund themselves in a way that is both diversified and more resilient to currency shocks.
