Masala bond
Also written Masala Bonds
A bond issued outside India by an Indian company but denominated in Indian rupees, so the foreign investor — not the Indian issuer — bears the risk of the rupee falling.
In plain language
When an Indian company borrows abroad in US dollars, it earns in rupees and repays in dollars. If the rupee weakens, its debt quietly grows.
A masala bond flips that. The bond is issued outside India, bought by foreign investors, but denominated in Indian rupees. Coupons and principal are paid in rupees, so the Indian issuer knows exactly what it owes. The foreign investor, who thinks in dollars or euros, carries the risk that those rupees are worth less when they arrive.
How it works
Section 2.4.3 of the workbook sets out the features:
- Corporate bonds issued outside India by Indian companies
- Denominated in Indian rupees
- Foreign investors are eligible to invest
- Advantage to the issuer: coupon and principal are paid in rupees, not in the investor's currency, so the risk of a fall in the rupee is borne by the foreign investor
- The first masala bond was issued by the International Finance Corporation (IFC) and listed on the London Stock Exchange
Set it against the other cross-border instruments in the same chapter:
| Masala bond | FCCB | |
|---|---|---|
| Currency | Indian rupees | Foreign currency, usually dollars |
| Currency risk on | The foreign investor | The Indian issuer |
| Convertible into equity? | Not described as convertible — a corporate bond | Yes — carries the option of converting into equity shares before maturity |
A worked example
Illustrative exchange rates. An Indian infrastructure company raises Rs 1,000 crore from a foreign investor, when USD 1 = Rs 80.
As a masala bond:
Investor pays = Rs 1,000 crore ÷ 80 = USD 125 million
At maturity, USD 1 = Rs 88
Issuer repays = Rs 1,000 crore (fixed in rupees)
Investor receives = Rs 1,000 crore ÷ 88 ≈ USD 113.6 million
Investor's currency loss ≈ USD 11.4 million, about 9.1% of principal
Had the company borrowed USD 125 million in dollars instead:
Issuer repays USD 125 million × Rs 88 = Rs 1,100 crore
Extra cost to the issuer = Rs 100 crore
The same rupee depreciation costs someone about the same amount either way. The masala bond decides who: the foreign investor, not the Indian company. (Coupons are ignored here to keep the currency effect visible.)
Why NISM asks about it
Chapter 2 (Securities: Types, Features and Concepts of Asset Allocation and Investing), section 2.4.3, in the discussion of corporate bonds and debentures. The one-line questions: where it is issued, in what currency, who bears the currency risk, and which institution issued the first one.
Common exam traps
- Issued outside India, denominated in rupees. An option describing a rupee bond issued in India, or a dollar bond issued abroad, is not a masala bond.
- Currency risk sits with the foreign investor, which is the entire point for the Indian issuer.
- The first masala bond was issued by the IFC, not by an Indian company, and was listed in London.
- A masala bond is not an FCCB. FCCBs are foreign-currency and convertible; masala bonds are rupee-denominated corporate bonds.
- It is an instrument for foreign investors — not a domestic retail product.
Where this is taught
- Series IV · Chapter 1: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
- Series XV · Chapter 2: Introduction to Securities Marketintroduced here
- Series XII · Chapter 2: Securities: Types, Features and Concepts of Asset Allocation and Investingintroduced here
Related terms
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Credit spreadThe extra yield a non-government borrower must pay over a government security of the same tenor — the market price of credit risk, quoted as an add-on over the risk-free rate.
- Coupon rateThe rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
- Foreign Currency Convertible BondA bond issued by an Indian company to investors in foreign currency, paying interest and principal in that currency and convertible into ordinary shares at a price usually set above the market price.