Previous Year Question
With reference to ‘IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/are correct?
The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
They are the rupee-denominated bonds and are a source of debt financing for the public and private sector.
Select the correct answer using the code given below.
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Correct Answer: C
Detailed Solution
Statement 1 is correct. The International Finance Corporation—IFC is a member institution of the World Bank Group. It was established in 1956 to support private-sector development in developing countries.
The World Bank Group consists of five major institutions:
International Bank for Reconstruction and Development—IBRD
International Development Association—IDA
International Finance Corporation—IFC
Multilateral Investment Guarantee Agency—MIGA
International Centre for Settlement of Investment Disputes—ICSID
Thus, describing the IFC as an arm of the World Bank Group is correct in the context of the question.
Statement 2 is also correct. Masala Bonds are Indian rupee-denominated bonds issued outside India. Their principal and interest obligations are denominated in rupees, although foreign investors invest through foreign currency.
Their most important feature concerns the allocation of currency risk:
If the rupee depreciates against the investor’s currency, the foreign investor may suffer a currency-conversion loss.
Currency risk is, therefore, borne primarily by the foreign investor.
In direct foreign-currency borrowing, this risk is generally borne by the Indian borrower.
In November 2013, IFC launched the first offshore rupee bond programme to support India’s domestic capital market and infrastructure financing. IFC subsequently named such instruments “Masala Bonds”, giving them an identity associated with Indian culture and cuisine.
Funds raised through Masala Bonds can be used for infrastructure and other eligible development projects. They can provide debt financing to eligible public-sector entities as well as private companies by enabling them to access overseas investors.
Masala Bonds differ from foreign-currency bonds as follows:
Basis | Masala Bond | Foreign-currency bond |
Denomination | Indian rupee | Dollar, euro or another foreign currency |
Place of issue | Outside India | Foreign market |
Exchange-rate risk | Primarily on investor | Primarily on Indian borrower |
Nature | Debt instrument | Debt instrument |
Current position (2026)
Masala Bonds can still be used as the rupee-denominated form of External Commercial Borrowing—ECB. Their issuance is governed by the RBI’s ECB framework, including applicable provisions relating to eligible borrowers, recognised lenders, maturity, end-use and other regulatory conditions.