In News:

The Enforcement Directorate (ED) has issued show-cause notices to the Kerala Chief Minister, a former Union Finance Ministry official, and officials of the Kerala Infrastructure Investment Fund Board (KIIFB). The notices relate to alleged violations of the Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) regulations in connection with KIIFB’s 2019 Masala Bond issuance.

The development has revived debate over off-budget borrowings by state-linked entities and their implications for fiscal transparency and regulatory compliance.

What are Masala Bonds?

Masala Bonds are rupee-denominated bonds issued overseas by Indian entities to raise funds from foreign investors.

Key Idea

Although the bonds are sold in international markets, they are denominated in Indian Rupees (INR). Therefore, the currency risk is borne by the investor, not the Indian issuer.

Evolution of Masala Bonds

• First issued internationally by the International Finance Corporation (IFC) in 2014 (?1,000 crore).
• Formally permitted by the RBI in 2015 under the framework for Rupee Denominated Bonds (RDBs).

Objectives

Masala Bonds were introduced to:

• Enable Indian entities to raise global capital in rupees
• Reduce dependence on foreign currency borrowings (External Commercial Borrowings – ECBs)
• Shift exchange rate risk away from Indian borrowers
• Promote the internationalisation of the Indian Rupee
• Develop the offshore rupee bond market

Key Features of Masala Bonds

Benefits of Masala Bonds

• Protect Indian borrowers from exchange rate volatility
• Provide access to a diversified global investor base
• Support infrastructure financing
• Enhance global confidence in the Indian rupee