Indian Economy - News & Discussion Oct 12 2013

chaanakya · Post by **chaanakya** » 19 Apr 2015 11:12

Suraj wrote: So much for the current weak exchange rate contributing to export growth. We're barely treading water on the trade front despite a low exchange rate. Exports are more closely correlated to strong domestic industrial output growth.

+1.

Frederic · Post by **Frederic** » 20 Apr 2015 21:42

Prof R.Vaidya writes about "Integrating Financial Markets Through MUDRA" in Swarajya Mag:

http://swarajyamag.com/economy/integrat ... ugh-mudra/

The initiative has attracted quite a bit of criticism and skepticism, but these do not understand the scope and possible structure and even the context in which the Mudra Bank became a necessity. That context is the extreme difficulty that small and micro enterprises face in accessing credit. The government has itself admitted that only 4 per cent of the 57.7 million small business units have access to institutional finance. This is true and unfortunate.

Unincorporated enterprises comprising proprietorship and partnership firms account for close to 50 per cent of India’s gross domestic product (GDP) and an almost similar share of value addition in the manufacturing sector. They also constitute almost 70 per cent of enterprises in various segments of the service sector, which has a nearly two-third share in GDP and has been averaging an 8 per cent growth in the last decade. Trade, which is part of the service sector, itself is nearly 17 per cent of GDP, as much as manufacturing.

In spite of playing such an important role in the economy, the credit available to unincorporated enterprises from formal banking channels is actually shrinking. Industry experts estimate that the demand for loans from the sector outstrips the supply by more than Rs 30 lakh crore.

Remember, Mudra Bank is not a regular lending bank. It will formulate lending norms and responsible financing practices for micro-finance institutions so that the small businesses do not face hardship over indebtedness, while getting a fair environment for repayment. It will facilitate credit of up to Rs 10 lakh to small entrepreneurs, benefitting small manufacturing units, shopkeepers, fruits and vegetable sellers, hair saloon, beauty parlors, truck operators, hawkers, artisans in rural and urban areas – the very sectors that get a raw deal from the formal banking sector. Providing access to institutional finance to such micro/small business units/enterprises will not only help in improving the quality of life of these entrepreneurs but also turn them into strong instruments of GDP growth and employment generation. The initial products and schemes under this umbrella have already been created and the interventions have been named ‘Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage of growth/development and funding needs of the beneficiary micro unit/entrepreneur.

Suraj · Post by **Suraj** » 20 Apr 2015 23:55

Excellent article by Prof. Vaidyanathan on Mudra bank.

R. Vaidyanathan wrote:Estimating a yield curve for our economy is a very difficult task. On the one side we have rates in the range of 12 to 14 per cent for corporate, more so for listed companies (nearly 8,000) of which 200/300 are actively traded in the exchanges. The remaining Uninc, which borrows at 2 to 6 per cent per month, is totally different. The transmission mechanism of our monetary policy is weak due to this segmented market.

This brings out the need to have a comprehensive approach towards the non–bank sector in the credit market instead of looking at issues in a piecemeal fashion.

Generally the interest rate for unincorporated enterprises varies from 2 per cent to 6 per cent a month, depending upon the requirement and speed of getting credit.

So we have a situation of huge funds available with the formal banking sector, on the one hand, even as the non-corporate sector is forced to borrow at prohibitive interest rates from the non-banking sector.

RamaY · Post by **RamaY** » 21 Apr 2015 00:07

^

The interesting thing is that this unorganized sector "survives" at such high cost of capital while the big companies are becoming NPAs even with lower cost of capital.

Mudra bank tries to provide capital at low-cost (interest) and thus making tens millions of these small employers highly profitable in no time and escape poverty.

Uttam · Post by **Uttam** » 21 Apr 2015 00:19

Interesting stats in this article. Almost all of the contraction in exports is due fall in value of export of petroleum distillates. The non-petroleum export saw almost no growth, probably because of relative strengthening of INR with respect to EUR and other currencies.

Despite export fall, analysts see CAD under control at 1.7 per cent

........................The fall in exports was mainly on account of 11 per cent decline in petroleum exports following a massive correction in crude prices.

"Even after accounting for 11.2 per cent decline in oil exports - from $ 63.1 to $ 56.1 billion, due to lower oil prices in FY15, growth in non-oil exports was a mere 1.2 per cent at $ 254.3 billion from $ 251.3 billion," Crisil said in a report. ..............

Suraj · Post by **Suraj** » 21 Apr 2015 00:20

Not just that, but the formal sector is biased towards capital intensive production rather than labour intensive. I posted an article about a week ago on this thread where NITI Aayog head Arvind Panagariya questions the industrialists' focus on capital intensive industries, and requests focus on greater labour intensive activities to absorb the labour pool. The small and micro enterprises are labour intensive, but work under very poor conditions as far as access to capital is concerned. If MUDRA works out well, a lot of these entities will put more money in the hands of its employees, and the wage growth at the bottom of the employment pool will benefit the economy, not to mention it is very politically beneficial too.

disha · Post by **disha** » 21 Apr 2015 00:27

How much one can borrow from MUDRA bank? I know at least 4 small & medium enterprises (one employs 2 persons, another employs some 5 and 2 part time and the rest employs some 10-30 persons - full time/part time) who are are looking to streamline and expand but need capital and are being financed by friends and family.

All 4 of them can benefit by borrowing and streamlining their operations.

Suraj · Post by **Suraj** » 21 Apr 2015 01:16

See the following post made recently with information on the MUDRA bank.

RoyG · Post by **RoyG** » 21 Apr 2015 05:22

Suraj wrote:Not just that, but the formal sector is biased towards capital intensive production rather than labour intensive. I posted an article about a week ago on this thread where NITI Aayog head Arvind Panagariya questions the industrialists' focus on capital intensive industries, and requests focus on greater labour intensive activities to absorb the labour pool. The small and micro enterprises are labour intensive, but work under very poor conditions as far as access to capital is concerned. If MUDRA works out well, a lot of these entities will put more money in the hands of its employees, and the wage growth at the bottom of the employment pool will benefit the economy, not to mention it is very politically beneficial too.

Dhume recently took potshots at the bank saying it's not the first bank to come up with loan schemes for the unorganized sector. Even if it doesn't work, it shows that the government has correctly identified SMEs as the real growth engine for India and is trying to do something to help.

Suraj · Post by **Suraj** » 21 Apr 2015 07:21

So what. It's been almost 70 years since independence. A lot of things have been tried before. All I care about is execution, not original ideas. Anyone can come up with ideas. Few can execute effectively. Take PMJDY. Even the bank account creation drive is not new. It's been done several times before. It took this administration to actually do it to almost total household penetration level. What's more, it's not an isolated drive. It's an integral part of something else - the elimination of top down subsidization in favour of a cash transfer scheme to targeted households, that eliminates the middleman of government apparatus. Everyone pays the same price at the outlet; the cash transfers help those targeted alone. That's an example of effective execution: set up the bank account coverage well, set up the cash transfer system well, make them work together.

nawabs · Post by **nawabs** » 21 Apr 2015 08:45

MSMEs: Bill to hike Investment limits in plant and machinery introduced in LS

http://www.thehindubusinessline.com/eco ... yndication

Gus · Post by **Gus** » 21 Apr 2015 09:36

execution and intention makes all the difference. knife in hand of murderer vs surgeon etc...

kmkraoind · Post by **kmkraoind** » 21 Apr 2015 10:43

Centre mulls using abandoned coal and mineral mines to produce geothermal power

As per the Ministry of New and Renewable Energy (MNRE) estimate, India can generate nearly 5,000 MW power from over 240 abandoned and flooded coal mines.

“Abandoned and flooded coal mines have good potential as low-enthalpy geothermal resources. At the average depths of approx. 100-1500 m, there is an intense heat exchange between the rocks of the caved rock mass and the mine water which could be used for heating and cooling purposes,” says the latest research report of the MNRE.

Other minerals mines like bauxite, iron ore, manganese etc can also be used for the purpose. Similarly, a large number of oil and gas wells, with depths varying from 3 to 4 km, that are struck dry or cease to produce oil or gas can also be tapped for the geothermal energy.
.........
At present, India doesn't use geothermal power though states like Chhattisgarh and Gujarat are in the process of setting up such plants. Indian government is also drafting a national Policy on geothermal power with an aim to tap 340 “hot-spring spots” across 11 states to generate 10,000 MW power. Of this, half or 5,000 MW can be generated from the exhausted coal mines only without lesser infrastructure cost, feel MNRE scientists.

nawabs · Post by **nawabs** » 21 Apr 2015 12:43

Smart city project: Japanese tech firm NEC wants to partner at least 20 cities

http://www.business-standard.com/articl ... 994_1.html

Once the policy is cleared by the Union Cabinet, likely by April-end, 100 cities will be chosen through a competition. That is, state governments will participate in a 'city challenge'. States will compete among themselves to have their cities among the 100 to be developed as smart cities.

nawabs · Post by **nawabs** » 21 Apr 2015 18:50

Roadmap to cut leakages, rationalise subsidies on anvil

http://www.business-standard.com/articl ... 580_1.html

For these these years the targets are: 3.9 per cent (of the GDP) for 2015-16; 3.5 per cent for 2016-17; and 3 per cent for 2017-18.

RoyG · Post by **RoyG** » 21 Apr 2015 20:39

Suraj wrote:So what. It's been almost 70 years since independence. A lot of things have been tried before. All I care about is execution, not original ideas. Anyone can come up with ideas. Few can execute effectively. Take PMJDY. Even the bank account creation drive is not new. It's been done several times before. It took this administration to actually do it to almost total household penetration level. What's more, it's not an isolated drive. It's an integral part of something else - the elimination of top down subsidization in favour of a cash transfer scheme to targeted households, that eliminates the middleman of government apparatus. Everyone pays the same price at the outlet; the cash transfers help those targeted alone. That's an example of effective execution: set up the bank account coverage well, set up the cash transfer system well, make them work together.

I agree. Just wanted to show that some still have this mental block about the SME sector. It's bizarre given that it accounts for a huge chunk of the economy.

Hari Seldon · Post by **Hari Seldon** » 21 Apr 2015 20:50

Happy to note that GoI will have some legislative victories to show the world - especially the GST bill and associated constitutional amendment.

When does MUdRA start ops? Would love to follow them on their webpage and keep track of loan disbursements by region, size, sector and repayment rates etc.

Suraj · Post by **Suraj** » 21 Apr 2015 21:34

Yes, the lack of focus on the MSME sector has a significant bearing on the lack of job growth and economic security at the bottom of the economic pyramid. It's further hampered by government regulations on what constitutes an MSME and assorted complicated banking regulations. There's also an attempt to 'protect' them by reserving certain things only to the MSME sector. This paradoxically results in stagnation because the sector is both protected and constrained from developing.

The new MUDRA bank focuses on ensuring capital support to this sector, while the newly tabled MSME bill attempts to ensure that the regulatory constraints they face are eased. This has parallels to one of China's original reforms - the TVE reforms. They started the other way around from us - first reforming small scale enterprises, and then tackling the SOEs (state owned enterprises) what they call PSUs. For those interested in MSMEs in India, it's worthwhile to read the history of TVE reforms.

Melwyn · Post by **Melwyn** » 22 Apr 2015 03:10

Government rejects demands from MPs to dilute black money bill

NEW DELHI: The government has spurned pressure from industry lobby groups as well as some lawmakers who had approached it to dilute two key moves - mandatory use of PAN for transaction above Rs 1 lakh and the Black Money Bill - announced in the budget to crack down on flow of illicit funds in the economy.

Representatives from several sectors - which see large volumes of cash transactions - have approached ministers seeking watering down of the proposal to make it mandatory to produce permanent account number (PAN) for all transactions of Rs 1 lakh or above. In several sectors, which are known for accumulation of black money, cash transactions are dominant. The presence of illicit cash in the economy also impacts other sectors, including purchase of durables and luxury items in cash.

As part of the crackdown on black money in local economy, finance minister Arun Jaitley has also proposed banning advance payment beyond Rs 20,000 for real estate deals.

nawabs · Post by **nawabs** » 22 Apr 2015 11:58

^^ Simplifying PAN card acquisition process

http://www.thehindubusinessline.com/eco ... yndication

You will no longer have to wait 15 days or so to get the Permanent Account Number (PAN), as the government aims to deliver it within 48 hours.

“Our effort will be to allot PAN within 48 hours from the time an application is made online,” a senior government official said here on Tuesday. This will be the next reform move after the April 10 notification when tax authorities simplified the procedures for obtaining PAN. Now, a voter identity card or Aadhaar number will be sufficient for establishing identity, date of birth and address.

Earlier, three different documents for the three purposes were required. The official also said that a ‘Jan-Dhan’ kind of approach will be adopted to expand the PAN base.

”Camps will be organised at district levels,” he said, adding that preparatory work is on for the new initiative, which will be announced soon.

It may be noted that the Pradhan Mantri Jan Dhan Yojana has been recognised by the Guinness Book of World Records for opening 1.80 crore bank accounts in one week (August 23-29, 2014), which was possible because of a camp-based approach.

The effort to ease the process and increase the PAN base is part of the government’s strategy to tackle the menace of black money.

According to the official, when the Budget proposed mandatory quoting of PAN for any cash purchase or sale exceeding the value of ₹1 lakh (from ₹5 lakh at present), many trade groups, especially bullion merchants, said the PAN base is low, especially in rural areas, adding that the move will hurt their business.

According to a Parliament question, over 20.95 crore PANs have allotted till July 25, 2014. The official said a greater number of PANs will help in tracking high-end expenditure and thus curb domestic black money generation. The Income-Tax Department has a mechanism called Annual Information Returns (AIR) that tracks high-value transaction with the help of PAN.
Tax base

Meanwhile, the official said that the number of income tax assesses had crossed four crore for 2013-14. With the department conducting a vigorous drive against non-filers of the income tax and with the use of more and more AIR data, the number of people filing returns has gone up. However, the official claimed that the effort is not to harass return filers through scrutiny.

“Out of 4.70 crore returns for 2013-14, just around six lakh were taken up for scrutiny,” the official added.

......................................................................................

Benami definition to go stricter, may include only wife, unmarried daughter

http://economictimes.indiatimes.com/art ... aign=cppst

prahaar · Post by **prahaar** » 22 Apr 2015 14:35

Suraj wrote:Yes, the lack of focus on the MSME sector has a significant bearing on the lack of job growth and economic security at the bottom of the economic pyramid. It's further hampered by government regulations on what constitutes an MSME and assorted complicated banking regulations. There's also an attempt to 'protect' them by reserving certain things only to the MSME sector. This paradoxically results in stagnation because the sector is both protected and constrained from developing.

The new MUDRA bank focuses on ensuring capital support to this sector, while the newly tabled MSME bill attempts to ensure that the regulatory constraints they face are eased. This has parallels to one of China's original reforms - the TVE reforms. They started the other way around from us - first reforming small scale enterprises, and then tackling the SOEs (state owned enterprises) what they call PSUs. For those interested in MSMEs in India, it's worthwhile to read the history of TVE reforms.

Growing up in 90s, there used to be a spate of articles in TOI, I at least remember Swaminomics, which used to regularly deride the MSME sector, saying India should follow Western model of big corporates and not waste resources on small enterprises. Was there something peculiar in 90s which led to many economists to discourage small entrepreneurship.

Suraj · Post by **Suraj** » 22 Apr 2015 20:20

It has been like that since the commanding heights of economy Nehru days. Big industries get all the focus. Small industries are not encouraged, but are instead basically mummified for display. Like in many other areas, the MSME policy framework is supposedly meant to protect the industries, but they were created by economists with no clue about the real world issues facing these industries. Therefore on the ground, the MSME laws merely kept the sector alive in a precarious state where access to capital was poor, and employment remained informal.

nawabs · Post by **nawabs** » 22 Apr 2015 20:30

Indian Railways first in line to raise rupee bonds offshore

http://www.business-standard.com/articl ... 619_1.html

Indian Railways Finance Corp, the finance arm of Asia's largest rail network, plans to raise up to $1 billion through offshore rupee bonds, making it the first domestic issuer to eye so-called "masala" debt to diversify its source of funds.

The Reserve Bank of India gave Indian companies the green light to raise bonds offshore in rupees earlier this month, a move seen as a small step towards full rupee convertibility, one of the objectives set by Reserve Bank of India Governor Raghuram Rajan when he took charge in 2013.

Rajan has since said full capital account convertibility, which would allow foreign investors to repatriate money at will, could happen in "a short number of years".

IRFC plans to use the cash to build and renew infrastructure, and is informally talking to bankers to understand the appetite and pricing in the market for rupee offshore bonds.

"We have a board approval to raise $1 billion from offshore market, but we are yet to decide how much to raise via rupee bond after we see the detailed notification from RBI," said Managing Director Rajiv Dutt at IRFC.

IRFC plans to borrow a total of Rs 17,655 crore ($2.81 bln) in 2015-16 from domestic and offshore markets.

................................................................................

Southwest monsoon to be below normal: IMD

http://www.business-standard.com/articl ... 494_1.html

Suraj · Post by **Suraj** » 22 Apr 2015 20:42

Masala bonds in general refer to Indian issued Rupee denominated bonds. There's a $30 billion limit on FIIs on holdings of government securities which has almost been reached. Another $51 billion limit of corporate bond issuances on FIIs, which is 2/3rds subscribed. I'm guessing an IR bond issue would fall under the government bond classification, but there's no clarity as to whether the are impacted by the $30 billion limit on foreign investors. Hopefully railway bonds as classified as infra bonds and don't face a cap, or get a separate cap.

member_28663 · Post by **member_28663** » 22 Apr 2015 20:56

Masala bonds are issued and listed offshore, for offshore investors, so I don't think the limits would apply.
I think the only Masala bond issuance so far has been the IFC issuance last year.

Great development in either case. I think it will be well received and show the way for more Indian entities to raise capital from offshore without hedging costs.

Suraj · Post by **Suraj** » 22 Apr 2015 22:25

They're still subject to RBI regulation, right ? The same RBI who defines the limits on FII holdings of Gsecs and corporate bonds. Admittedly I don't have enough information about this topic, so anything substantiative is welcome.

panduranghari · Post by **panduranghari** » 22 Apr 2015 22:54

Why should railway bonds not be considered infrastructure bonds? Isn't it a simple administrative exercise?

With regards to Swaminomics, he is the esteemed brother of esteemed Mani Shankar. Swaminathan Ankalesaria Aiyer is deeply rooted in Milton Friedmanesque thought process of top down economics. Pity he was not born in Soviet Union. He was neo Keynesian even before Paul Krugman became the patron saint of neo Keynesians.

member_28663 · Post by **member_28663** » 22 Apr 2015 23:18

They're still subject to RBI regulation, right ?

No, they won't be.

The RBI's wants to prevent hot money coming in, pushing up the INR, and one day leaving suddenly. The whole process would be destabilising. So we have the investor quotas. Foreign FIs are required to register themselves with the RBI (thus they are called QFIIs or Qualified FIIs). Then they pay a fee to gain rights to purchase onshore rupee securities. Against any purchases made within their quota, they are allowed to buy (and sell) INR onshore.

In the case of Masala bonds (I just looked them up), the bonds are denominated in INR, but they are paid for and settled in USD. Also, they are listed offshore (London stock exchange for the IFC bonds) and settled in a global depository (Euroclear or Clearstream).

Pricing these bonds would be a headache (they are technically what's called a quanto product) but what's important from the regulator's perspective is that they are not "hot money". The issuer gets the USD equivalent of the INR amount, buys 'real' INR with it, and only has an INR denominated liability.

So not only is the bond outside of RBI's jurisdiction, FX flows wise the RBI has nothing to worry about with these issuances.

Suraj · Post by **Suraj** » 22 Apr 2015 23:39

rahulsidhu wrote:
They're still subject to RBI regulation, right ?
No, they won't be.

The RBI's wants to prevent hot money coming in, pushing up the INR, and one day leaving suddenly. The whole process would be destabilising. So we have the investor quotas. Foreign FIs are required to register themselves with the RBI (thus they are called QFIIs or Qualified FIIs). Then they pay a fee to gain rights to purchase onshore rupee securities. Against any purchases made within their quota, they are allowed to buy (and sell) INR onshore.

In the case of Masala bonds (I just looked them up), the bonds are denominated in INR, but they are paid for and settled in USD. Also, they are listed offshore (London stock exchange for the IFC bonds) and settled in a global depository (Euroclear or Clearstream).

Interesting, thanks. But please see the following post I made a few days ago with a news article on the topic: link
While it may be outside our purview now, GoI does not seem to be comfortable with the current situation and wants masala bond settlement to be within their control.

Vayutuvan · Post by **Vayutuvan** » 23 Apr 2015 05:36

rahulsidhu wrote:quanto product

Is that a different name for a derivative? Is it a kind of a derivative?

vina · Post by **vina** » 23 Apr 2015 09:15

Pricing these bonds would be a headache (they are technically what's called a quanto product) but what's important from the regulator's perspective is that they are not "hot money". The issuer gets the USD equivalent of the INR amount, buys 'real' INR with it, and only has an INR denominated liability

If it is really a "quanto" product like you say it is, then the first thing the RBI should do is BAN it. The buyer in a quanto is insulated from currency risks, which means, the bond seller (here the IR and hence the govt) takes that risk, even if the underlying is in rupees.

It means that if you are sitting in the US, and that if IR sells the bond on the terms you get, you get x % return guaranteed on your capital in converted to USD , with the credit rating of whichever vehicle the IR uses to borrow (probably a SPV like IRFC) as event risk .

All in all a major Pakistan. For the country, it is lot riskier to go the quanto route, than go for full capital account convertibility. This kind of too clever by half schemes can quickly lead you down the toilet. There is no friggin way India should be putting it's sovereign powers behind this kind of stuff. Furriners need to take the exchange rate risk. Dont want it, stay out.

vina · Post by **vina** » 23 Apr 2015 09:23

vayu tuvan wrote:
rahulsidhu wrote:quanto product
Is that a different name for a derivative? Is it a kind of a derivative?

Yes . A cross currency one, that gives currency protection to the buyer. Even hedging these kind of exotic options is devilishly difficult (if at all possible in large quantity, these will not be exchange traded plain vanilla options, but over the counter exotics, written out by major global Invesment banks). And to price exotics, you have to trust the numbers that a PhD geek churns out of the math models. No market reality check unlike a widely traded liquid plain vanilla. It is all mark to model , rather than mark to market.

And frankly, these are the kind of things the market makers/derivative desks/derivative research/hedge funds guys do and takes massive expertise. The Indian Railways are better off running trains, rather than trying to be a hedge fund . Touching these kinds of products without knowing what is , is sure to be fatal. Ask multiple countries and companies which are in the hock when these products move against them . The banks will be fine. They will hedge against it, charge their fees, make their money.. IR will be phucked.

svinayak · Post by **svinayak** » 23 Apr 2015 09:24

rahulsidhu wrote:Masala bonds are issued and listed offshore, for offshore investors, so I don't think the limits would apply.
I think the only Masala bond issuance so far has been the IFC issuance last year.

Great development in either case. I think it will be well received and show the way for more Indian entities to raise capital from offshore without hedging costs.

They should be raising $5B of the masala bonds offshore

The Great Indian Railway can be a great annuity payment scheme for long term with a fixed interest rate.
All capital exp for railways and Metro in the country can be funded this way.

member_28663 · Post by **member_28663** » 23 Apr 2015 10:39

Interesting, thanks. But please see the following post I made a few days ago with a news article on the topic: link
While it may be outside our purview now, GoI does not seem to be comfortable with the current situation and wants masala bond settlement to be within their control.

The article is talking about the settlement of regular INR (specifically, sovereign) bonds offshore, not Masala bonds.

When an FII buys bonds onshore under their eligibility quota, at present they need to maintain an account with a bond depository onshore (Clearing Corp of India) and keep the bonds there. What they are asking for is to let them move and keep the bonds to their global depository accounts (e.g. Euroclear).

Once they are in Euroclear, the FIIs can also transact in these bonds with each other i guess. This part is not really clear to me because that would either require INR payments in Euroclear which would mean Euroclear can hold INR accounts on behalf of clients. Not sure exactly what is being proposed.

But these are just technical details. The big picture, the way I see it, is that the MoF is trying to raise the Rupee's international profile by enabling offshore settlements (many other countries do, such as South Africa, Turkey). The RBI, I presume, wants to keep a close tab on bonds movements and that's why is not in favour of this move.

member_28663 · Post by **member_28663** » 23 Apr 2015 11:00

If it is really a "quanto" product like you say it is, then the first thing the RBI should do is BAN it. The buyer in a quanto is insulated from currency risks, which means, the bond seller (here the IR and hence the govt) takes that risk, even if the underlying is in rupees.

Not in this case. Quanto products are defined generally as (from Wikipedia):

A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some fixed rate.

In the case of Masala bonds, it is the *buyer* who bears the currency risk rather than the seller. For the seller, it's simple: at each coupon payment date, take the rupee amount, convert into USD at the prevailing exchange rate, and pay out the bond holder.

As for pricing, yes, technically this is a quanto with non-linear risks. However, my best guess is that in practice no one would really care much. All non-deliverable financial products (NDFs, NDS etc.) are technically quantos but the cashflows are simple enough for market participants to not care too much.

Edit: Just spoke to someone who understands this better, and they said quanto refers to products where the exchange rate is *fixed*. So perhaps i was wrong to bring the word in this discussion and Masala bonds are not really quanto.
Havings said that, my point about nonlinear risks and them being ignored still stands. It's a pretty simple product for both buyer (assuming they want the INR exposure) and seller.

vina · Post by **vina** » 23 Apr 2015 12:38

rahulsidhu wrote:
A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some fixed rate.

In the case of Masala bonds.. the prevailing exchange rate

vina · Post by **vina** » 23 Apr 2015 13:00

quanto with non-linear risks. However, my best guess is that in practice no one would really care much. All non-deliverable financial products (NDFs, NDS etc.) are technically quantos but the cashflows are simple enough for market participants to not care too much

.

Edit: Just spoke to someone who understands this better, and they said quanto refers to products where the exchange rate is *fixed*

.

member_28397 · Post by **member_28397** » 23 Apr 2015 14:10

IMF latest GDP nominal rankings FY 2015 projects India at 7

, will cross France by FY 2016

http://knoema.com/nwnfkne/world-gdp-ran ... and-charts

TSJones · Post by **TSJones** » 23 Apr 2015 18:45

New tax in India causes uproar. Don't know if this has been posted before.

http://www.bloomberg.com/news/videos/20 ... cmpid=yhoo

Arjun · Post by **Arjun** » 23 Apr 2015 19:45

MaharathiArjun wrote:IMF latest GDP nominal rankings FY 2015 projects India at 7 , will cross France by FY 2016

http://knoema.com/nwnfkne/world-gdp-ran ... and-charts

Something seems not quite right...Are most major economies other than US, China and India headed for a contraction this year ? I know this is true for Brazil, but not across the Euro-board like this forecast seems to assume.