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Glossary

Masala bonds

Category — Bond Types
Masala bonds are bonds denominated in Indian Rupees (INR) and issued outside India. As these bonds are issued outside India, they are traded in foreign currency, usually in US dollars. Indian corporations usually issue Masala bonds to raise funds from the foreign investors.

In 2007, Masala bonds were first listed on the London Stock Exchange with Barclays Bank as their issuer. In 2013, the Masala bonds of IFC (IFC, 7.75% 3dec2016, INR) were listed on the Singapore Stock Exchange. In late September 2017, the Indian Renewable Energy Development Agency (IREDA) placed 5Y "green" Masala bonds on the London Stock Exchange (Indian Renewable Energy Development Agency, 7.125% 10oct2022, INR).

A unique feature of Masala bonds is that the currency risk in INR is borne by investors rather than bond issuers, as it would be if an Indian corporation issued securities in foreign currency. It means that the yield of the investor in Masala bonds will change against the declared yield if the rate of Indian Rupee (INR) rises or falls against the payment currency, e.g., US dollar during the bond maturity period. Masala bonds are attractive to issuers because they allow them to set a coupon rate lower than domestic bonds in India, as well as help meet the demand of foreign investors without assuming the currency risk.

Masala bonds are generally purchased by non-resident Indians and foreign investors. With higher inflation in India compared to other countries, interest rates in INR are currently higher than those in major foreign currencies such as USD, EUR, and JPY. It makes the yield of the Masala bonds more attractive for foreign investors compared to bonds denominated in USD / EUR / JPY. These securities are also attractive for investors, as they do not have access to the national market and get an opportunity to acquire INR-denominated assets through the reliable infrastructure of Euroclear and Clearstream international depositories.

Many investors prefer bonds with shorter maturities to limit the risks associated with, for example, the economic climate in the country or changes in exchange rates that may occur over a longer time period. This is one of the reasons why most Masala bonds have a maturity of 3 to 5 years.
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