Masala Bond are rupee-denominated bonds issued to overseas buyers/investors .
Bonds are debt instruments which are typically used by companies/corporates to raise money from investors. Masala bonds thus are debt instruments but can be issued by Indian corporates only to oversees buyers. Indian rupee has limited convertibility and therefore the Masala bond is a boon for Indian corporates wishing to raise money from abroad.It also gives overseas investor another instrument to invest in Indian caompanies/markets.
However being rupee denominated the investor will lend the dollar equivalent of the rupee denomnation of the bond and upon maturity of the baond the Indian corporate will pay back the dollar equivalent of maturity amount in rupee. For example - With a masala bond, an Indian corporate could issue Rs. 10 billion worth of bonds with the promise of paying back Rs. 11 billion in one year.Now the investors will lend the dollar equivalent of the Rs. 10 billion. After one year (given maturity period of the bond is one year), the Indian corporate needs to pay back the dollar equivalent of Rs. 11 billion. So , we can see here that the currency or exchange rate risk lies with the investors.
The bond will be issued through IFC (International Finance Corporation) of the World Bank group.
This is not the first time that a domestic currency denominated overseas bond has been launched by such catchy names. Infact many times it has been done before to denote the country of origin . For example- China has similar Dim-sum bonds and Japan has Samurai bonds.