What is Indian rupee dominated "Masala bond"? -Advantages to Corporates, Investors and the Country.

Author- Shubham Saxena

You might have heard of Samurai bond of Japan, Dim Sum bond of China now we have spicy Indian Masala bond. Rupee dominated offshore bonds, popularly called Masala bonds are becoming more appetizing for both issuers and investors, and India also stands at an advantageous position with masala bond.

What is a masala bond?

Masala bonds are issued by Indian corporates in offshore markets such as LSE, NYSE via IFC (International Financial Corp.), the funding arm of World Bank and are invested by the foreign investors. These are issued and payable in INR but redemption and repayment will be linked to INR vs USD or other foreign currency exchange rate. That means they are subjected to currency exchange rate risks. 

But in INR dominated masala bonds contrary to USD dominated bonds (ECB), FX risk is beared by the creditor i.e. the foreign investor. That means the Indian local issuer does not have to worry about the currency movements. RBI allows eligible Indian institution to raise a maximum of $750 million per year through masala bond with a minimum maturity period of five years.

Indian rupee dominated Masala bonds issued by the International
Finance Corporation (IFC), an arm  of the World Bank for offshore
funds raising by Indian corporates.2013

The first masala bonds were issued by the International Finance Corporation (IFC), an arm  of the World Bank, in October 2013.  In 2014, overseas investors bought $26.5 billion of Indian government and corporate bonds onshore. In coming years this figure will reach  new highs with the success of masala bonds. Many more Indian companies are lining up to raise funds from masala bond.

Advantages of Masala bond

Benefit to Corporates

1. They can borrow at low interest rates from offshore markets. Interests rates in developed countries are much lower than prevalent in India. 

2. Being issuer they are not subjected to FX risks. It will be fully borne by the investors. Indian corporates have suffered considerable losses earlier on ECB which are usually USD dominated due to continuous structural downtrend of INR against USD since last 2-3 decades.

3. They can access wide investor base.

4. It will also help in diversification of portfolio.

Benefit to Investors

1. Masala bond, carrying relatively much higher interest rate, is a great investment option for offshore investors.

2. They can bet on INR exchange rates. They can benefit when rupee appreciates against the bond's redeemable/repayable currency.

3. Investors who are reluctant to venture into unknown markets can easily show interest in masala bonds owing to the credibility of IFC.

Benefit to India

1. This will help in building up foreign investors confidence and knowledge about about Indian economy. 

2. This will contribute to capital account, thus balancing Balance of Payment.

3. Masala bond is a good way to tap foreign capital. India has envisioned few many ambitious goals like Makes in India, developing smart cities, digital India, boosting infrastructure, climate INDC etc. For this India will require around $400 billion (INR26 lakh crores) in next five years. A big chunk of it will have to be financed by foreign capital. India has to look for ways to tap foreign sovereign wealth and attract foreign capital.

4. INR has been falling in a structural downtrend since last few decades against major hard currencies. Given that FX risk is borne by the creditor, during repayment of bond coupon and maturity amount, if rupee depreciates, RBI will realize marginal saving during repayment.

Why Indian banks are reluctant to reduce their base rate even after 50 bps repo rate cut by RBI?

RBI in September 2015 in it's fourth bimonthly monetary policy review slashed repo rate by 50 bps while most banks cut their lending rates in the range of 20-40 bps, thereby not passing on the full benefit to the customers. What's holding the banks back?

 Shubham Saxena Grad. IIT Dhanbad

It is not exactly that banks don't want to cut their base rates, they really can't cut the base rates anymore. Let's see what is restraining them. RBI in September 2015 cut down repo rate by 50 bps while most banks cut their lending rates in the range of 20-40 bps, thereby not passing on the full benefit to the customers. RBI and government are alleging and compelling banks to pass on the full benefit of rate cut to the customers. The main reason cited for why banks are very reluctant to reduce lending rates is the high interest rates offered by the government on small saving schemes. These high rates purportedly makes it difficult for banks to reduce their deposit rates and consequently lending rates.

September 29, 2015: RBI Governor Raghuram Rajan announcing fourth bimonthly monetary policy review.
RBI cut down repo rate by 50 bps from 7.25% to 6.75% in a surprise outcome.

At present, small savings rates are linked to yields on government bonds of similar maturity. The rates are revised annually. Government pays a premium of 25-50 bps over and above average G-Sec yield. In falling interest rate regime, which we are currently witnessing, government may prefer to shield investors in small saving schemes from a volatile slide in interest by continuing linking the interest rates on schemes to G-Sec yields rather than repo rates or bank deposits. In falling interest rate cycle, small savings schemes become unattractive if they are linked to repo rate or bank deposit.

Just have a quick look at the interest rates provided on various small saving schemes like 

Post Office MIS:                      ~8.4% @5yr 
National Saving Certificate:      8.5% @5yr 
Post Office TDS:                       8.1%-8.5% @1,2,3,5 yr 
Post Office Saving Account:     ~4% (interest rate is tax free)
Senior Citizen Saving Scheme: ~9.2% @5yr. 

Further in most of the schemes the interest is tax free, no TDS. While currently, most banks in India are providing interest rate on FD below 8% and that is taxable too. 
It is obvious that if banks decrease their deposit rates, people will more frequently start mobilizing their funds into such schemes. This makes it very much difficult for banks to lower their base rates as it would badly effect their deposits and margin. The result is that banks are receiving less money in deposits and they don't want to lower their balanced interest margin between borrowing and lending.


Further, Indian government has floated ambitious programs like Make In India, smart cities, digital India in recent year. These would require over $400 billion (₹ 26 lakh crores) in next five years and 70% is likely to be debt financed. Going forward, the bulk finance will be catered to commercial banks that will put a considerable strain on balance sheet due to the mismatch between tenures of deposits and loans disbursed as infra and power loans have long gestation period. An increase in stressed loans is expected, however government and central bank, RBI have recently taken several steps to reduce NPA and stressed loans. It must me kept in mind that stressed loans, 10% as of Nov, 2015, has a significant impact on the outlook of the country's economy and banks, given by credit rating agencies. India's current credit outlook is 'stable' by Fitch. The outlook of most of the Indian banks on the IDRs (Issuer Default Ratings) is stable. Downgrade by even a notch would prove painful for the banking sector and subsequently for the economy.

Why is the price of diesel cheaper than petrol in some countries? What does the Refinery Output Prices says?

Why is Gasoline (Petrol) Fuel More Expensive Than Diesel? 

-in view of the final crude oil refinery output.

lets explore the reasons..

I. Why is the price of diesel cheaper than petrol in many countries?

Interesting, as a matter of fact, diesel should be costlier than gasoline. In many countries, diesel is costlier than gasoline unlike the case in India.
Of every 45 gal of petroleum products (produced from 42 gal of crude oil) volume of gasoline is almost twice that of diesel. This follows that diesel must be costlier than petrol. In many countries, government fuel subsidies reverses the play.

Gasoline (Petrol) should have been cheaper than Diesel; World country oil consumption order;
Gasoline, Diesel, Kerosene, Jet fuel, Heating Oil, LPG gas, Tar<> India, US, Japan, EU, Russia, Brazil

II. A brief case of India:
India's significant difference in Gasoline (Petrol) and Diesel prices. A major part of transportation of goods in India is carried out by trucks which use diesel as fuel that means most of the commodities prices are significantly effected by the price of diesel, so government of India gives higher subsidy on diesel than on gasoline (petrol) making diesel cheaper than petrol in India. India is big country and goods reaches a state after a long journey of thousands of kilometers. Even a slight increase in diesel price would increase the price of most of the commodities and hence the inflation.

       Gasoline, Diesel, Kerosene, LPG/ cylinder extracts of crude  oil and natural gas: Country consumption order ;India, , US, Japan, EURussia, Brazil, Germany, France, Italy, Bangladesh, Pakistan,UK, Nepal

Big part of India is rural, around 50-60% and diesel is consumed more in rural India, in trucks, buses, jeeps and most importantly in tractors for tilting farms. Most policies of Indian government are made keeping in mind its impact on rural India and farmers which gets the first pinch of price rise. Obviously it is the duty of the government to safeguard the poor section. It don't want to put or pass burden to the poor rural India.

Also see the pricing of gasoline and diesel in US.

Gasoline and Diesel retail prices in US; wrt taxes, distribution and marketing, refining, crude oil