Masala Bonds are rupee-denominated bonds issued outside India by an Indian entity.s i.e the funds would be raised from overseas market in Indian rupees. According to Reserve Bank of India FAQ, any corporate, body corporate and Indian bank is eligible to issue Rupee denominated bonds overseas.
These are debt instruments used to raise money from foreign investors in local currency. The framework for issuance of rupee bonds overseas falls within the External Commercial Borrowings policy.
The name Masala Bond was used to give it a unique identity to signify the local flavour with respect to Indian culture and cuisine. International Finance Corporation (IFC) used this term for the first time.
If the borrowing is in foreign currency, one has to pay more while servicing debt when the domestic currency is depreciating. The issuance of rupee-denominated bonds transfers risk associated with currency fluctuations to investors and not to the issuers.
Other similar bonds
Similar to Masala Bonds, there are foreign-currency-denominated bonds related to many countries.
Dim Sum Bonds – China ( a Chinese renminbi-denominated bond issued by a Chinese entity in Hong Kong)
Samurai Bonds – Japan (a Japanese yen-denominated bond issued by a non-Japanese entity in the Japanese market)