KIIFB Case: What Are Masala Bonds?

KIIFB Masala Bond Case: What Are Masala Bonds and Why Do They Matter?

Recently, the Enforcement Directorate (ED) issued notices to Kerala Chief Minister Pinarayi Vijayan and two others in connection with the 2019 Masala Bond issue of the Kerala Infrastructure Investment Fund Board (KIIFB). Following this development, Masala Bonds have once again come into public focus. It is therefore important to understand what Masala Bonds are and why they are significant for India’s economy.

Masala Bonds are rupee-denominated bonds issued outside India by Indian companies or government-backed institutions to raise capital from global markets. Although they are issued overseas, the bonds are denominated and settled in Indian rupees. Masala Bonds were first issued in 2014 by the International Finance Corporation (IFC), and in 2015, the Reserve Bank of India (RBI) formally permitted their issuance.

One of the key features of Masala Bonds is that the foreign exchange risk is borne by the investor and not by the issuer. This protects Indian entities from fluctuations in global currency markets and reduces their exposure to exchange-rate volatility, making Masala Bonds a relatively safer borrowing option for Indian issuers.

Both public and private sector entities can issue Masala Bonds. These bonds are open to investment by foreign individuals, institutional investors, and international financial organisations. Typically, the maturity period of Masala Bonds ranges from three to five years.

The funds raised through Masala Bonds are mainly used for infrastructure development, housing projects, working capital requirements, and refinancing of existing debt. By enabling Indian institutions to raise funds without taking on foreign currency risk, Masala Bonds reduce dependence on external commercial borrowings in foreign currencies. At the same time, they promote the internationalisation of the Indian rupee by increasing its use in global financial markets. As a result, Masala Bonds play an important role in India’s long-term financial and economic strategy.