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When Indian companies borrow in dollars, they are essentially taking a gamble on the rupee. If the rupee devalues before they are able to repay the loan, the cost of that debt goes up, sometimes considerably. Masala bonds were designed to eliminate this issue, and in the last 10 years, they have established themselves as a reliable option for Indian companies, as well as NBFCs and public sector entities, to gain access to global capital without worrying about currency exchange.
If you have a basic knowledge of Indian corporate finance, you have probably seen the term “masala bond” in relation to HDFC, NTPC, or the recent politically charged Enforcement Directorate case involving Kerala’s KIIFB. This article will explain what masala bonds are, how the risk-shifting mechanism works, the regulatory framework set by the RBI, where the market is, and how it is taxed today.
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What Are Masala Bonds?
Masala bonds are rupee-denominated bonds issued by Indians in the international capital markets, mainly on the London Stock Exchange, Singapore Exchange, and the NSE IFSC in GIFT City. The name “masala bond” draws on the Indian association of “masala,” or spices. The first such bond was issued by the International Finance Corporation (IFC) on November 10, 2014, when it raised ₹1,000 crore [1] for investment in Indian infrastructure projects.
Here’s how it works: the face value of the bond, the coupon, and the repayment are all fixed in rupees. However, when a foreign investor purchases the bond, they do so with foreign currency, and at maturity, they receive repayment in foreign-currency-equivalent payouts converted from rupee cash flows. So if the rupee depreciates against the dollar or euro before maturity, the investor gets less value in their own currency, not the Indian issuer. The currency risk is priced into the bond, but it sits with the buyer, not the borrower.
A quick example: Let’s say an NBFC in India raises ₹1,000 crore through a masala bond issued to European pension funds. If the rupee is at 83 or 90 to the dollar when the bond matures, the NBFC still owes ₹1,000 crore, plus the coupon, at bond maturity. But the variation in the exchange rate determines the dollar return for the investor.
Why Indian Corporates Actually Use Them
- No currency mismatch on the balance sheet: repayment obligations are in rupees and aligned with rupee-denominated revenues
- A larger and more active investor base: European and Asian institutional investors and insurers who wish to have rupee exposure without having to set up onshore accounts
- Diversification away from bank loans and the domestic corporate bond market, which can get crowded or expensive
- A track record of strong demand: HDFC’s debut masala bond in July 2016 (₹3,000 crore, the first ever by an Indian corporate) was oversubscribed 4.3 times, signalling a healthy global appetite for Indian credit
- Useful for green and infrastructure financing: NTPC and IREDA have both used masala bonds specifically to fund renewable energy projects, appealing to ESG-focused global investors
RBI Guidelines on Masala Bonds Explained
Masala bonds fall under RBI’s External Commercial Borrowings (ECB) framework, and the rules have tightened since the market’s early years.
| Parameter | Current position |
| Minimum maturity | Generally 3 years for INR-denominated ECBs |
| All-in-cost ceiling | Benchmark + applicable spread; the benchmark is the corresponding-maturity G-Sec yield. |
| Automatic route limit | US$750 million equivalent per financial year |
| Eligible issuers | Entities eligible to raise ECBs, subject to RBI conditions |
| Eligible investors/lenders | Residents of FATF/IOSCO-compliant jurisdictions, subject to applicable conditions |
| Restricted end-use | RBI’s negative end-use list applies, including restrictions on certain real estate and capital-market uses. |
Source: RBI
The conditions were tightened in June 2017, partly because lower-rated issuers had started tapping the route aggressively. Between September 2016 and April 2017 alone, Indian firms raised roughly ₹33,165 crore [2] this way, prompting the central bank to step in.
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Masala Bonds Taxation: What Changed in 2023
Previously, Masala bonds benefited from a concessional withholding tax regime. Interest on qualifying rupee-denominated bonds could attract TDS at 5% under Sections 194LC and 194LD of the Income Tax Act, compared with the higher rates otherwise applicable to certain non-resident interest income. This 5% concession for bonds issued outside India was not extended beyond June 30, 2023 [3]. Concessional provisions continue to apply to certain qualifying bonds issued through an IFSC, including GIFT City, subject to the applicable conditions.
This provision makes GIFT City listings more favorable than London and Singapore listings and is worth factoring into any masala bond cost comparison done today.
Lessons from the KIIFB Masala Bond FEMA Case
In 2019, the Kerala Infrastructure Investment Fund Board (KIIFB) raised ₹2,150 crore ($312 million) through its debut Masala bond [4], becoming the first Indian sub-sovereign entity to tap the offshore rupee bond market. The five-year bond was listed on the London Stock Exchange.
The issue later became the subject of an Enforcement Directorate (ED) investigation. In November 2025 [5], the ED alleged that ₹466.91 crore out of ₹2,672.80 crore raised through KIIFB’s Masala-bond borrowings was used for land acquisition, which it argued violated RBI restrictions on land purchase and real estate activities. KIIFB disputed the allegation, saying the land was acquired for infrastructure projects.
The Kerala High Court initially stayed further proceedings in December 2025, although the ED subsequently challenged the order. The case remains ongoing. But regardless of the outcome, this case demonstrates that there are strict, monitored end-use conditions for masala bonds.
Where the Market Stands Right Now
The market has evolved since HDFC’s 2016 listing. The London Stock Exchange (LSE) remains a leading global venue for Masala bonds, with 48 bonds listed and $7.16 billion (₹443 billion) raised historically, according to its latest figures [6]. That number has been built up in phases rather than a steady climb: heavy issuance occurred in 2016 and 2017 with the listings of HDFC, NTPC, and IREDA bonds, slowed down with the 2017 RBI tightening and the 2020 pandemic, and has recently picked up as global rate cycles make rupee-denominated paper look relatively attractive to yield-hungry foreign investors.
A few trends worth flagging for anyone tracking this space in 2026:
- GIFT City is the new center of gravity. After 2023, the Indian withholding tax changes have favored bonds listed on an Indian IFSC exchange. At the moment, NSE IFSC has a cost advantage over both London and Singapore that didn’t exist a few years ago. In the coming years, additional issuers might dual-list, if not move to listing, their bonds primarily in GIFT City.
- Quasi-sovereign and infrastructure-linked issuers remain the core user base. NTPC and IREDA, along with other state-linked issuers such as KIIFB, have been the most consistent issuers, more than private sector corporates, partly because infrastructure financing timelines suit the 3–5 year masala bond maturity profile well.
- Green and ESG-labelled masala bonds are a growing sub-segment. Global ESG mandates continue to drive capital toward climate-certified paper, and Indian renewable energy financiers are well-positioned to keep tapping this demand.
- Regulatory scrutiny has increased, not decreased. The KIIFB case signals that RBI and enforcement agencies are actively monitoring end-use compliance rather than treating masala bond proceeds as a formality—issuers (and their finance teams) should expect more diligence around fund utilization going forward, not less.
Although masala bonds have not gained the mainstream financing tool status like domestic corporate bonds or ECBs, they have created a reliable niche market for infrastructure and green bond financing as well as for issuers who might be seeking rupee-denominated investments to avoid US dollar exposure.
Masala Bonds Frequently Asked Questions
Masala Bonds are rupee-denominated bonds issued outside India by eligible Indian entities. The issuer raises funds overseas, but the bond’s principal and interest are denominated in Indian rupees.
Broadly, the overseas investor bears the INR exchange-rate risk. This is different from a conventional foreign-currency borrowing, where an Indian borrower may have to repay a fixed amount in dollars, euros, or another foreign currency.
Masala Bonds can help an Indian issuer access international investors while avoiding a direct foreign-currency repayment obligation. This can reduce the mismatch between an issuer’s rupee-based revenues and its debt-service obligations.
No. This is the central distinction. A foreign-currency bond has its principal and interest denominated in a foreign currency, whereas a Masala Bond is denominated in INR even though it is issued overseas.
The overseas rupee-bond framework falls within India’s foreign-exchange regulatory framework administered by the RBI, alongside the applicable rules for the relevant borrowing and issuer. RBI has issued specific measures and guidance relating to rupee-denominated bonds overseas.
Not automatically. Masala Bonds are designed as overseas rupee-denominated debt instruments, and the applicable investor eligibility and issue structure determine who can subscribe. Indian residents should not assume that an overseas Masala Bond is available to them simply because it is denominated in rupees.
Sources
- Government of India Arthapedia — Masala Bonds
- Business Standard — RBI puts restrictions on Masala bond issuance
- Finance Industry Development Council — Submission on 194LC/194LD
- London Stock Exchange — KIIFB lists debut Masala bond
- Economic Times — Kerala CM moves HC against ED show-cause notice
- London Stock Exchange — Masala Bonds
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