July 2016 | srei
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July 2016

Indian Economy Review

Global economic turmoil forces major financial institutions to trim India’s growth prospects

Volatile economic conditions across the globe have impacted India’s growth prospects too. The International Monetary Fund (IMF) has trimmed the country’s growth projections to 7.4% each for 2016 and 2017, a drop of 0.1% from its previous forecast, attributing it to more sluggish investment recovery while declaring Brexit as a "spanner" in the global economic recovery. It also warned that headwinds from weakness in India’s corporate and bank balance sheets, decelerating pace of reforms and slow exports may weigh on its economic growth. Moody's expects India's economic growth over the next two years to face a challenge from lacklustre global demand and high leverage in some corporate sectors. However, an optimistic Asian Development Bank expects India to meet 7.4% and 7.8% growth forecasts for this and the following year, respectively. Finance Minister Arun Jaitley also expressed hopefulness that India is in a sweet spot and can grow at a healthy pace in 2016-17, with the country expected to get good amount of rainfall in the current year. CRISIL has pegged India’s economic growth at 7.9% in 2016-17, assuming normal monsoon, and said the quality of the country’s growth has improved.

Domestic GDP Growth

Rise in food prices pushes up inflation in June

India’s retail inflation rose to a 22-month high of 5.77% in June on increase in food prices compared with 5.76% growth in May. Wholesale Price Index-based inflation rose sharply to 1.62% in June from 0.79% in May. CRISIL Research said folks in rural areas – or 69% of India’s population -- have got the rough end of the stick on inflation compared with their urban counterparts.

Government eyes selling its stake held through SUUTI, among other options, to meet divestment plans

The government plans to sell its stakes in companies held through the Specified Undertaking of the Unit Trust of India (SUUTI). It will slash its holdings in ITC, L&T and Axis Bank in the first phase of divesting minority stakes it owns in 51 companies. It kick started the process to sell 15% stake in NBCC and has invited merchant bankers to manage the share sale. Further, it will move ahead with the plan for strategic divestment of select public sector undertakings (PSUs) and there could be at least two-three such stake sales in the current fiscal.

The Cabinet took the following key decisions:

  • Approved key changes to the constitutional amendment bill for the goods & services tax (GST).
  • Cleared an increase in FDI limit for lone entities in Indian stock exchanges to 15% from 5%.
  • Gave approval for introducing amendments to Benami Transactions (Prohibition) (amendment) Bill 2015 in the Parliament.
  • Approved an outlay of Rs 12,000 crore for skilling 1 crore people in the next four years (2016-2020) under the Pradhan Mantri Kaushal Vikas Yojana (PMKVY).

Other important developments in the month

India and the European Union launched a joint project to identify barriers faced by Indian exporters in key markets and come up with recommendations to overcome them. The government signed a three-point bilateral agreement with the US government aiming to harness new technologies in the hydrocarbon sector. India and Kenya deepened and expanded cooperation in a wide range of areas; they signed seven pacts. India also signed a long-term agreement for the purchase of pulses from Mozambique. India and Cyprus agreed to rework their tax treaty.

Prime Minister Narendra Modi asked ministers to fast-track implementation of schemes announced in the budgets since 2014. He has asked NITI Aayog to create a new architecture of policy making that anticipates problems and suggests remedies. The Lok Sabha passed the Benami Transactions (Prohibition) Amendment Bill, 2015. It also passed the Lokpal and Lokayuktas (Amendment) Bill, 2016. The Parliament passed the bill for compulsory afforestation fund. The government infused Rs 22,915 crore to recapitalise 13 state-run banks and asked them to submit plans for raising funds through the capital markets. The Ministry of Finance (MoF) has asked all profit making PSUs to use their surplus cash to buy back shares and pay dividend, besides considering issuing bonus shares or go for stock split. It deferred by one year the implementation of the income computation and disclosure standards (ICDS). It rejected the RBI’s suggestion for retrospective application of a proposed foreign investment policy for hybrid instruments.

The government clarified that black money declarants using the one-time compliance window cannot pay tax and penalty from undisclosed income to bring down their liability and such acts will not get any immunity. It allowed more time for paying tax to those declaring unaccounted assets under the black money scheme. Only half the tax, surcharge and penalty have to be paid in the current year while the remaining amount can be paid by September 30, 2017.

The government has asked states to remove all local taxes on essential food items. It will modify the General Financial Rules (GFR) to facilitate ease of doing business. It plans to move to a multi-year budgeting framework that will allow ministries to indicate ‘rolling’ targets for expenditure for at least the next three years. It raised Mudra Bank’s loan target to Rs 1.8 lakh crore for the current financial year. Further, it approved an additional investment of Rs 16,641 crore for affordable housing for construction of nearly 2.44 lakh houses for urban poor under Pradhan Mantri Awas Yojana (Urban). It has asked the states to reduce the stamp duty on registration of houses for poor with the aim to push affordable housing projects across the country. The government will include all Central plan schemes under the Public Financial Management System (PFMS).

The government formed a committee to study the feasibility of adopting a new financial year. It has asked states to set up their own `Direct Benefit Transfer (DBT) Cells' to make the process of delivering benefits more reliable and time-bound. It has fixed the end of the current calendar year as the target to link all DBT with Aadhaar. It has allowed oil companies to increase kerosene price by 25 paise every month until April 2017. It announced fresh relief measures for the gold jewellery industry to alleviate the impact of the excise duty levied in the budget. It unveiled the draft regional connectivity scheme with a fare of Rs 2,500 for 500 km flights operating from regional airports.

The Central Board of Direct Taxes (CBDT) unveiled the draft norms for taxing buyback of shares in unlisted companies. It also signed seven unilateral Advance Pricing Agreements (APAs) with Indian taxpayers in a bid to reduce tax litigation.

Regulatory developments in the month

The Telecom Commission fixed the weighted average spectrum usage charge (SUC) at a minimum of 3% of revenue. TRAI has sought public opinion on setting up of an ombudsman in the sector for speedy resolution of rising subscriber complaints over issues such as wrong billing and poor service quality. Directorate General of Civil Aviation (DGCA) has capped ticket cancellation charges and barred airlines from levying additional amount for refund process starting August 1.

Among key economic indicators released in the month

India’s industrial production increased 1.2% in May following a revised decline of 1.35% in April. The core sector expanded 5.2% in June following a reading of 2.8% in May. Exports rose 1.27% from the previous year to $22.5 billion in June, while imports fell 7.3% to $30.6 billion in June, resulting in a trade deficit of $8.1 billion compared with $6.27 billion in May. The government’s fiscal deficit for the first three months of the current financial year stood at Rs 3.26 lakh crore, constituting 61.1% of the Budget Estimates for 2016-17 compared with 51.6% in the corresponding period of 2015-16.

India’s Nikkei Manufacturing Purchasing Managers’ Index (PMI) rose to 51.7 in June from 50.7 in May, while services PMI fell to 50.3 in June from 51.0 in May.

Indicators Current Previous
Monthly WPI Inflation 1.62% (Jun 2016) 0.79% (May 2016)
Industrial Growth 1.2% (May 2016) -1.35% (April 2016)
Exports $65.31bn (April - June 2016) $66.69bn (April - June 2015)
Imports $84.55bn (April - June 2016) $98.92bn (April - June 2015)
Trade Balance -$19.24bn (April - June 2016) -$32.23bn (April - June 2015)
Gross Tax Collections Rs 2,80,853cr (April-June 2016-17) Rs 2,15,113cr (April-June 2015-16)

IIP Growth

IIP Growth

  • India’s industrial production grew by 1.2% in May following a revised decline of 1.35% in April.

IIP-Core Sector Growth

Core IIP Growth

  • India’s core sector expanded 5.2% in June following a reading of 2.8% in May.

Fiscal Deficit

Fiscal Deficit

  • Government’s fiscal deficit for the first three months of the current financial year stood at Rs 3.26 lakh cr, constituting 61.1% of the Budget Estimates for 2016-17, compared to 51.6% in the corresponding period of 2015-16.

Global Economy Review

Global economic outlook turned pessimistic

The International Monetary Fund (IMF) lowered its global economic growth forecasts for 2016 and 2017 as Britain's surprise vote to leave the European Union (EU) created a wave of uncertainty amid already fragile business and consumer confidence. It expects global GDP to grow 3.1% in 2016 and 3.4% in 2017 — down 0.1% for each year from April 2016 estimate.

US Fed signals rate hike on cards

The US Federal Reserve (Fed) kept interest rates unchanged at its latest monetary meeting but said that near-term risks to the economic outlook have tapered, suggesting a rate increase may be on the cards in 2016. The Fed said the economy had expanded at a moderate rate and job gains were strong in June. It added that household spending has also been growing strongly, and pointed to an increase in labour utilisation. US GDP grew 1.2% annually in Q2 2016 following a downwardly revised 0.8% growth (from previously estimated 1.1%) in Q1 2016.

World GDP Growth

World GDP Growth

Major Indicators Current Previous Major Global Central Bank Latest Key Interest Rates
US GDP 1.2% Q2 2016 0.8% Q1 2016 US Fed Funds Rate 0.25-0.50%
US unemployment 4.9% July 2016 4.9% June 2016 Bank of England 0.25%
UK GDP 2.2% Q2 2016 2.0% Q1 2016 European Central Bank 0.00%
Euro Zone GDP 1.6% Q2 2016 1.7% Q1 2016 Japan Benchmark Rate -0.10%
Japan GDP 1.9% Q1 2016 -1.1% Q4 2015    
China GDP 6.7% Q2 2016 6.7% Q1 2016    
Singapore’s GDP 1.8% Q1 2016 1.8% Q4 2015    

Key economic indicators

  • Budget deficit through June was $401 billion, up 27% from the same period a year ago.
  • The advance June goods trade deficit came in at $63.3 billion, widening from the revised $61.1 billion trade gap reported a month earlier.
  • Retail sales rose 0.6% in June after a 0.2% climb in May.
  • Industrial output increased 0.6% in June, the strongest gain since July 2015, after an upwardly revised 0.3% decline in May. Capacity utilisation rose 0.5 percentage point to 75.4%.
  • Consumer prices rose 0.2% in June after a similar gain in May.
  • Non-farm payrolls rose 255,000 in July, compared to the rise of 292,000 in June.
  • Among housing indicators, new home sales increased 3.5% to a seasonally adjusted annual rate of 592,000 units in June, the highest level since February 2008, compared with May’s revised 572,000. Existing home sales increased 1.1% to an annual rate of 5.57 million units in June (the highest level since February 2007) compared with 5.51 million units in May.

Eurozone growth to be impacted by Brexit

Growth outlook for Eurozone was also weak. The IMF said that Eurozone’s GDP growth is expected to decelerate from 1.6% this year to 1.4% in 2017 mainly due to the negative impact of the UK referendum outcome. Meanwhile, the European Central Bank (ECB) maintained interest rate at a record low as it seeks to boost economic recovery. The region’s GDP expanded 1.6% in Q2 2016 annually after 1.7% growth in Q1 2016.

Key economic indicators

  • The region recorded 24.6 billion euro goods trade surplus in May 2016 compared with 18.3 billion euro surplus in May 2015.
  • Industrial production declined 1.2% in May following a rise of 1.4% in April.
  • Retail sales rose 0.4% in May month-on-month compared with a revised April estimate of 0.2% growth.
  • The jobless rate was at 10.1% in June, stable compared to May 2016 and down from 11.0% in June 2015.
  • Annual inflation was 0.2% in July 2016, up from 0.1% in June 2016.

UK economic prospects turn gloomy after Brexit

Short-term economic outlook turned gloomy for the UK after Brexit. The IMF lowered the country’s growth forecast for 2017 to 1.3%, down 0.9% from April’s estimate. The Bank of England lowered its key interest rate to a record low 0.25% from 0.5% and also expanded its quantitative easing program to 435 bn pounds from 375 bn pounds. The UK economy expanded 2.2% annually in Q2 2016 against 2% in Q1 2016.

Key economic indicators

  • The public sector net borrowing decreased 2.2 billion pounds from the previous year to 7.8 billion pounds in June.
  • Trade deficit in goods increased to 9.9 billion pounds in May from 9.4 billion pounds in April.
  • Industrial production fell 0.5% month-on-month in May compared with a 2.1% rise in April.
  • Consumer prices advanced 0.5% in June compared with 0.3% in May.
  • Retail sales fell 0.9% in June after a 0.9% rise in May.
  • The ILO unemployment rate fell to 4.9% for the three months to May, down from 5% for the three months to April. The claimant count rose 12,200 month-on-month in May and by a further 400 in June.

China GDP grew 6.7% in Q2 2016

China's economy grew 6.7% year-on-year in the three months through June, steady compared to the previous quarter. The People’s Bank of China said that it would use various policy tools to maintain appropriate liquidity and reasonable growth in credit and social financing.

Key Economic Indicators

  • Exports fell 4.8% year-on-year in June compared with a 4.1% decline in May, while imports plunged 8.4% in June compared with a fall of 0.4% in May, thereby resulting in a trade surplus of $48.11 billion in June compared with $49.98 billion in May.
  • Fixed asset investment climbed 9% year-on-year for the January-June period, compared with an increase of 9.6% in the first five months of the year.
  • Industrial output rose 6.2% in June from a year earlier compared with 6% growth in May.
  • Home prices rose 7.3% in June from a year earlier compared with a 6.9% rise in May.
  • New yuan loans rose to 1.38 trillion yuan in June from 985.5 billion yuan in May.
  • Retail sales grew 10.6% in June from a year earlier, compared with a 10% increase in May.
  • The Consumer Price Index rose 1.9% in June from a year earlier, compared with a 2% gain in May. Producer Price Index fell 2.6% from a year earlier in June compared with a 2.8% decline in May.
  • The official manufacturing PMI came in at 50.0 in June versus 50.1 logged in May and April.

Japan announces fresh stimulus package

The Japanese government unveiled a $265 billion stimulus package to revitalise the nation's sluggish economy. Further, the Bank of Japan decided to provide further monetary easing steps to prop up the economy. The central bank increased the purchases of exchange traded funds to 6 trillion yen from 3.3 trillion yen, although it maintained its base money target at 80 trillion yen and interest rate at -0.1%.

Key economic indicators

  • The current account surplus contracted 2.4% year-on-year to 1.809 trillion yen in May.
  • Exports fell 7.4% year-on-year in June after falling 11.3% in May while imports plunged 18.8% in June after dipping 13.8% in May, resulting in a trade surplus of 692.8 billion yen in June as against a deficit of 60.9 billion yen in the same month last year.
  • The unemployment rate fell to 3.1% in June, down from 3.2% in the previous month.
  • Industrial production rose 1.9% in June following a 2.6% decline in May.
  • Consumer prices fell 0.5% in June from a year earlier.
  • The leading index dropped to 99.7 in May from 100.0 in the previous month. The coincident index fell to 109.9 in May from 112.0 in April.
  • The quarterly "tankan" survey stood at +6 in June, unchanged from the previous survey in March.

Domestic Fixed Income Review

Domestic G-sec Yield

6 Month LIBOR

The interbank call money rate remained below the repo rate of 6.50% for most of the month primarily owing to comfortable liquidity in the system amid periodic fund infusion by the Reserve Bank of India (RBI) through repo auctions and inflows from the government’s month-end spending. However, to keep the call rate from falling too low, the RBI conducted reverse repo auctions. Some pressure was also seen on rates owing to outflows pertaining to indirect taxes and state development loan auction.

Government security prices (gilts) rose sharply in the month with the yield on the 10-year benchmark – the 7.59%, 2026 paper – falling to 7.16% on July 29, 2016 compared with 7.45% on June 30, 2016. Prices were boosted earlier on speculation that Arvind Panagariya, currently the vice-chairman of NITI Ayog, may replace incumbent RBI Chief Raghuram Rajan. Panagariya is widely seen as dovish on inflation, which led to market expectation that interest rates would be reduced. Further buying interest was seen as market players held the view that interest rates are likely to be cut further in coming months, as the monetary policy committee comes into force.

The committee, which will have three nominees appointed by the government, is expected to adopt a more growth-supportive stance. Gilts rose sharply after the US Federal Reserve, at its meeting, left the federal funds rate target range unchanged at 0.25-0.50%. Bonds were also supported by a fall in global crude oil prices and US benchmark treasury yields. Further rise was seen in gilts on the back of easy liquidity conditions and higher-than-expected cut-off prices in some weekly gilt sales.

Further gains were, however, restrained due to profit booking and intermittent weakness in the rupee. Prices were also put under some pressure after the Bank of England in its policy meeting did not announce an interest rate cut or any stimulus measures, surprising participants. Uncertainty over the appointment of the next RBI governor weighed on prices.

Among major developments, the government is likely to conduct the proposed buyback and switch operations of government securities worth Rs 75,000 crore only in the second half of the current fiscal. The RBI said the ceiling under Market Stabilisation Scheme has been fixed at Rs 30,000 crore for the current fiscal. It said the Sovereign Gold Bonds held in demat form will be eligible for trading from June 13 on the stock exchanges recognised by the government under the Securities Contracts (Regulation) Act, 1956. It may allow commercial banks to borrow from its daily lending window by pledging top-rated corporate bonds as collateral, in addition to government securities. SEBI said electronic book mechanism will become mandatory from July 1 for issuance of debt securities worth over Rs 500 crore on private placement basis. BSE and NSE received SEBI’s approval to launch electronic book mechanism for issuance of debt securities on private placement basis. BSE decided to launch a new debt platform to provide ease in reporting and settlement of corporate bonds, government securities, commercial papers and certificate of deposits. India Index Services & Products launched a new index called ‘Nifty 1D Rate Index’ to measure the returns generated by market participants lending in the overnight market.


Fixed Income Indicators

Rates & Liquidity

  29-Jul-16 1 Week Ago 1 Month Ago
Repo 6.50 6.50 6.50
Reverse Repo 6.00 6.00 6.00
CRR 4.00 4.00 4.00
LAF o/s Repo (Rscr) 3495 8874 2927
LAF o/s Rev Repo (Rscr) 3004 11050 26447

Overnight                                         Rate(%)

  29-Jul-16 1 Week Ago 1 Month Ago
Mibor 6.59 6.50 6.40
Call 6.55 6.55 6.05
CBLO 6.28 6.46 6.22
OIS 1Y 6.50 6.52 6.55
OIS 5Y 6.49 6.57 6.63

CDs                                                             Yield(%)

  29-Jul-16 1 Week Ago 1 Month Ago
1-Month 6.52 6.49 6.79
3-Month 6.60 6.58 6.77
6-Month 6.87 6.86 7.10
1-Year 7.21 7.23 7.40

CPs                                               Yield(%)

  29-Jul-16 1 Week Ago 1 Month Ago
1-Month 6.85 6.85 7.95
3-Month 7.21 7.21 7.97
6-Month 7.80 7.89 8.35
1-Year 8.10 8.20 8.61

Short Term Bonds                                        Yield(%)

  29-Jul-16 1 Week Ago 1 Month Ago
1 Y G-Sec 6.84 6.83 6.97
1 Y AAA 7.28 7.30 7.68
1 Y AA 7.80 7.82 8.20
2 Y G-Sec 6.85 6.88 7.04
2 Y AAA 7.40 7.54 7.78
2 Y AA 7.87 8.01 8.25

Long Term Bonds                          Yield(%)

  29-Jul-16 1 Week Ago 1 Month Ago
5 Y G-Sec 7.04 7.11 7.38
5 Y AAA 7.58 7.70 8.08
5 Y AA 8.23 8.35 8.73
10 Y G-Sec 7.16 7.25 7.44
10 Y AAA 7.82 7.93 8.20
10 Y AA 8.64 8.75 9.02

Top 5 Graded G Secs                                   Yield(%)

  29-Jul-16 Previous Close 1 Month Ago
07.59 GS 2029 7.26 7.28 7.59
07.59 GS 2026 7.16 7.19 7.45
07.88 GS 2030 7.26 7.29 7.63
07.61 GS 2030 7.22 7.24 7.59
07.68 GS 2023 7.16 7.18 7.53


  29-Jul-16 1 Week Ago 1 Month Ago
USD/INR 67.02 67.35 67.68
EURO/INR 74.27 73.80 75.02
GBP/INR 88.30 88.35 90.49
100 JPY/INR 64.69 63.37 66.21
USD/EURO 0.90 0.91 0.90


10 Year G-sec movement


Corporate Bond Yield


Corporate AAA, AA Bond Spreads


Economic Events Calendar

August 11, 2016
  • US Import and Export Prices, July
  • China Industrial Production, July
  • China Retail Sales, July
  August 26, 2016
  • US GDP, Q2
  • US Trade Balance, June
  • US Services PMI, August
  • US University of Michigan Consumer Sentiment Index, August
  • UK GDP, Q2 2016
August 12, 2016
  • US Producer Price Index, July
  • US Retail Sales, July
  • US Business Inventories, June
  • US University of Michigan's Consumer Sentiment Index, August
  • Eurozone GDP Flash, Q2
  • Eurozone Industrial Production, June
  • India’s Index of Industrial Production, June
  • India’s Consumer Price Index Combined Inflation, July
  August 29, 2016
  • US Personal Income and Outlays, July
  • US Dallas Fed Manufacturing Survey, August
  • Japan Unemployment Rate, July
August 15, 2016
  • US Empire State Manufacturing Survey, August
  • US Housing Market Index, August
  August 30, 2016
  • US Consumer Confidence, August
  • US S&P Case-Shiller HPI, June
  • Eurozone Economic Sentiment, August
August 16, 2016
  • US Consumer Price Index, July
  • US Housing Starts, July
  • US Industrial Production, July
  • Eurozone Trade Balance, June
  • UK consumer price index, July
  • UK Producer Price Index, July
  • India’s Wholesale Price Index inflation for July
  August 31, 2016
  • US ADP Employment Report, August
  • US Chicago PMI, August
  • US Pending Home Sales, July
  • US Farm Prices, August
  • Eurozone Unemployment Rate, July
  • China Manufacturing PMI, August
  • Japan Manufacturing PMI, August
  • India GDP estimate, April-June
  • India’s CPI for industrial workers, June
  • India’s Government Finances, June
August 17, 2016
  • US Federal Open Market Committee (FOMC) Meeting Minutes
  • UK Labour Market Report, July
  • Japan Trade Balance, July
  September 1, 2016
  • US Productivity and Costs, Q2
  • US Manufacturing PMI, August
  • US ISM Mfg Index, August
  • US Construction Spending, July
  • Eurozone Manufacturing PMI, August
  • UK CIPS/PMI Manufacturing Index, August
  • India’s Nikkei Manufacturing PMI, August
August 18, 2016
  • US Philadelphia Fed Business Outlook Survey, August
  • US Leading Indicators, July
  • European Central Bank (ECB) Meeting Minutes, July
  • UK Retail Sales, July
  September 2, 2016
  • US Employment Situation, August
  • US International Trade, July
  • US Auto Sales, August
  • US Factory Orders, July
  • Eurozone producer price index, July
August 19, 2016
  • UK Public Sector Finances, July
  • Japan All Industry Index, June
  • India’s CPI for rural and farm labourers, July
  September 5, 2016
  • Eurozone Composite PMI, August
  • Eurozone Retail Sales, July
  • UK CIPS/PMI Services, August
  • India Services PMI, August
August 22, 2016
  • US Chicago Fed National Activity Index, July
  September 6, 2016
  • US Services PMI, August
  • US ISM Non-Mfg Index, August
  • Eurozone GDP, Q2 2016
August 23, 2016
  • US New Home Sales, July
  • Eurozone Consumer Confidence Flash, August
  • Japan Manufacturing PMI, August
  September 7, 2016
  • US Federal Reserve’s Beige Book
  • UK Industrial Production, July
  • China Merchandise Trade Balance, August
August 24, 2016
  • US Manufacturing PMI, August
  • US Existing Home Sales, July
  • Eurozone Composite PMI, August
  September 8, 2016
  • US Consumer Credit, July
  • ECB Policy Announcement
  • China Consumer Price Index, August
  • China Producer Price Index, August
August 25, 2016
  • US Durable Goods Orders, July
  • US Jobless Claims
  • Japan consumer price index, July
  September 9, 2016
  • US Wholesale Trade, July
  • UK Merchandise Trade, July
  • Japan Tertiary Index, July

US Fixed Income Markets - Overview

US benchmark treasuries finished a volatile month slightly stronger in July. The 10 year benchmark bond settled at 1.46% yield on July 29 as against 1.49% on June 30. Bond prices gained initially as concerns over the Brexit fallout boosted safe haven demand. However some encouraging domestic economic indicators coupled with periodic gains registered by US equities pulled bond prices down. Expectation that the US Fed would raise interest rates before the end of the financial year and the Bank of England’s decision to keep interest rates unchanged dented sentiment for treasuries further. Demand for bonds was rekindled towards the end of the month on anticipation of more stimulus from the Bank of Japan following Japanese Prime Minister Shinzo Abe's plan for a $265 billion stimulus package in an effort to boost the economy.

US 10 Year Govt. Bond Yield


Learning Centre– Masala Bonds

Masala bonds have been in the news in recent months. This investor education note demystifies these fixed income securities.

The term ‘masala bonds’ refers to bonds issued by Indian corporate houses in overseas markets. They are rupee denominated, which means that the issuer has to make principal and interest payments in rupees. They are attractive for issuers as it helps diversify their sources of borrowing by accessing markets beyond India’s borders. The first masala bonds were issued by the International Finance Corporation (IFC) in 2013. The central bank has issued guidelines permitting Indian companies, NBFCs, and infrastructure investment trusts to issue these securities. Currently, the banking regulator permits Indian entities to raise a maximum of $750 million per year through masala bonds with a minimum maturity of five years.

For the overseas investor, the higher interest rate offered compared to bonds issued by domestic entities, is attractive. Further, the finance ministry has cut the withholding tax, which is a tax deducted at source on residents outside India on interest income of masala bonds to 5% from 20%, adding to their allure. However, investors must be mindful of the currency risk associated with investing in these securities. If the rupee depreciates, the interest realized in terms of the local currency, may be lower than expected.

Masala bonds have recently been seeing an increase in demand, and are critical for Indian companies that want to raise funds for growth. The securities can widen the investor base for an issuing entity by providing access to markets abroad. The investor benefits from the higher yields offered. The securities also enhance the potential of the rupee as an international currency.

CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions which may be based on the views expressed in this Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division, which may, in its regular operations, obtain information of a confidential nature which is not available to CRISIL Research. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.