With reference to ‘IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/are correct?

1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
2. 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:

The correct answer is Both 1 and 2. Both statements about IFC Masala Bonds are correct. Let us examine each statement carefully to understand why.

Understanding What Masala Bonds Are:
"Masala Bonds" is a term coined by the International Finance Corporation (IFC) to refer to rupee-denominated bonds issued outside India. The word "Masala" (a Hindi word for spice blend) was used to give the instrument a distinct Indian flavour, much like how "Dim Sum bonds" are associated with China and "Samurai bonds" with Japan. These bonds allow Indian entities to raise funds from foreign markets, but the borrowing is denominated in Indian Rupees (INR) rather than in a foreign currency like the US Dollar.

Statement 1 — "The International Finance Corporation, which offers these bonds, is an arm of the World Bank."
This statement is correct. The International Finance Corporation (IFC) is indeed a member of the World Bank Group. The World Bank Group comprises five institutions:

1. International Bank for Reconstruction and Development (IBRD)
2. International Development Association (IDA)
3. International Finance Corporation (IFC)
4. Multilateral Investment Guarantee Agency (MIGA)
5. International Centre for Settlement of Investment Disputes (ICSID)

The IFC specifically focuses on private sector development in developing countries. It was the IFC that first issued rupee-denominated bonds in the overseas market in November 2014 and named them "Masala Bonds," making them a recognised financial instrument globally. Since IFC is a formal arm (constituent institution) of the World Bank Group, Statement 1 is factually accurate.

Statement 2 — "They are the rupee-denominated bonds and are a source of debt financing for the public and private sector."
This statement is also correct. Masala Bonds have two defining characteristics that make this statement true:

(a) Rupee-Denominated Nature:
Masala Bonds are issued in Indian Rupees (INR) in overseas markets (such as the London Stock Exchange). This is a crucial distinction: while the bonds are sold to foreign investors, the denomination is in INR. This means the currency risk — the risk of exchange rate fluctuation — is borne by the foreign investor, not the Indian issuer. If the Rupee depreciates, the foreign investor gets fewer dollars when converting back, not the Indian borrower. This makes it an attractive and safer form of external borrowing for Indian entities.

(b) Source of Debt Financing for Public and Private Sectors:
Masala Bonds can be issued by both public sector entities (such as public sector undertakings or government-backed corporations) and private sector entities (such as private Indian companies and banks). The Reserve Bank of India (RBI) has allowed both categories to raise funds through this route. For example, entities like HDFC, NTPC, and Indian Railways Finance Corporation have issued Masala Bonds to tap into foreign capital markets for debt financing purposes. Thus, they serve as a tool for raising external debt capital for a broad spectrum of Indian borrowers.

Conclusion:
Both statements are individually accurate and well-established facts about IFC Masala Bonds. Statement 1 correctly identifies IFC as part of the World Bank Group, and Statement 2 correctly describes Masala Bonds as rupee-denominated instruments accessible to both public and private sector entities for debt financing. Therefore, the answer is Both 1 and 2.