Fixed Income
Next series of inflation index bonds could be linked to CPI, says RBI

The inflation index bonds will not enjoy any special tax benefits and all the taxes which will be applicable will be at par with any other government security. They will also be considered in the statutory liquidity ratio requirements of banks, the central bank said

The Reserve Bank of India (RBI) on Monday said the soon-to-be-launched inflation index bonds could also be linked to consumer price index (CPI) in the future.


“The new instruments to be issued down the line when perhaps CPI index stabilises, we may move over (to consumer price inflation). But currently, the choice is for WPI inflation for the current series which is going to be issued (on 4th June),” RBI executive director R Gandhi said.


Gandhi, who oversees the internal debt management department, was speaking during a specially-arranged conference call with market participants to clear doubts surrounding inflation index bonds (IIBs), the first tranche of which is to be issued on 4th June.


The plan came to fruition after finance minister P Chidambaram in the FY 2014 Budget announced that RBI would launch inflation indexed bonds to help public hedge themselves against price increases at a time real interest rates are still negative, thus crimping their savings.


IIBs are pursuant to the Budget proposal to “introduce instruments that will protect savings of poor and middle classes from inflation and incentives household sector to save in financial instruments rather than buy gold”.


Both the government as well as the RBI are concerned over the rising gold imports as its putting pressure on the current account deficit (CAD), which widened to historic high of 6.7% in the third quarter of 2012-13.


There is a strong wedge between the consumer and wholesale price-based inflation indices. Experts are of the view that linking them to the CPI will entice retail investors more.


He said the RBI has increased the non-competitive portion of the first tranche, which would be of retail investors' liking to 20% from the earlier 5%. One will have to contact a primary dealer and preferably have a demat account to buy these instruments.


The RBI is also mulling over introducing a special series of bonds for retail investors after October 2013, he said.


The RBI, which is targeting to issue up to Rs15,000 crore through the issuance of IIBs this fiscal, will think of additional ways of marketing the retail centric issue, Gandhi said.


This is the RBI’s second shot at launching inflation bonds and with gold, whose high imports are causing concern to the economy by way of record high current account deficit, being seen as a hedge against inflation due to the negative real rates of interest, a lot is being aimed to achieve from an instrument like IIBs.


Gandhi said IIBs are like any other government security and the money raised through the issue will be a part of the government's half yearly borrowing calendar.


It will not enjoy any special tax benefits and all the taxes which will be applicable will be at par with any other government security, Gandhi said, adding they will also be considered in the statutory liquidity ratio requirements of banks.


He further said foreign investors will be able to buy these bonds, but within the existing total investment limits of $25 billion of government debt.


While government bonds are issued on a weekly basis, the inflation-linked bonds will be issued separately on a monthly basis.


India, China to consider further steps for maintaining peace across border area

Singh and Li said both countries need to appropriately handle cooperation by maintaining peace and tranquility in the border areas and on the trans-border river issues

India and China have decided to take further measures for maintaining peace and tranquility along their border following the recent standoff in Ladakh after a Chinese incursion there. 
Addressing a joint press meet, after discussions on “mutual interest and concern”, both Indian Prime Minister Manmohan Singh and his Chinese counterpart Li Keqiang, acknowledged their talks—first last night and then this morning—had been candid and frank, a diplomatic euphemism for their forthright discussions.
The talks come nearly a month after the 19-km-deep incursion by the Chinese troops in Depsang valley in Ladakh, which was resolved only two weeks ago.
Singh said, “We have tasked our special representatives to consider further measures that may be needed to maintain peace and tranquility along the border. We agreed that our special representatives will meet soon to continue discussions, seeking early agreement on a framework for a fair, reasonable and mutually acceptable boundary settlement.”
On his part, Li, while admitting that there were “some problems” between the two countries, said: “Both sides believe that, with regard to the boundary question, one that is leftover by history, the two sides have over time established the principles on this question.


Oil ministry proposes gas price hike to $6.7 per mmBtu

In a note for the Cabinet Committee on Economic Affairs, the ministry has proposed raising gas price for state-run firms immediately and that for RIL from April 2014

The oil ministry has moved a Cabinet note to raise the price of natural gas produced by state-owned ONGC and OIL as well as private firms like Reliance Industries to $6.7, less than $8-$8.5 hike previously expected. 
In a note for the Cabinet Committee on Economic Affairs (CCEA), the ministry has proposed raising gas price for state-run firms immediately and that for RIL from April 2014, sources privy to the development said. 
ONGC/OIL and RIL currently get $4.2 per million metric British thermal unit (mmBtu) as the price of natural gas. 
The ministry wants the Rangarajan Committee recommendation of pricing domestically produced natural gas at an average of international hub prices and cost of imported LNG instead of present mechanism of market discovery be accepted with a minor modification.  
Instead of the Rangarajan panel’s suggestion of calculating gas price every month, the ministry has proposed notifying the gas price on a quarterly basis. The gas price based on average of April-June rates would come to $6.775 per mmBtu, much less than doubling of rates previously expected. 
Sources said the hike in natural gas price by $1 would result Rs3,155 crore per annum hit on fertiliser plants for producing 23 million tons of urea this fiscal and Rs4,144 crore a year for 32 million tons of urea production from 2017-18. 
The impact of every US dollar increase in gas price would be about Rs10,040 crore per annum on the power sector for 28,000 MW of electricity generating capacity. 
Sources said ministry wants the pricing formula proposed by the panel to apply to all forms of natural gas—conventional, shale and coal-bed methane (CBM). Also, the price determined shall be applicable to all consuming sectors uniformly. 
They said it wanted the new pricing guidelines to apply from 2013 itself on all domestically produced gas barring cases where it is either governed by a definite formula prescribed in the Production Sharing Contract (PSC) or the government had previously fixed a tenure for the same. 
This essentially meant that RIL would get the new price only from 1 April 2014 upon expiry of the fixed five-year term of current rate of $4.205 per mmBtu. 
State-owned ONGC and Oil India (OIL) can, however, get the new rates this year itself for gas they produce from fields given to them on nomination basis by the government. Gas from nominated fields, called APM gas, was last revised in June 2010 to $4.2 from $1.79. 
The Rangarajan panel suggested rates may also not apply to BG Group-operated Panna/Mukta and Tapti fields in the western offshore as the current rates of $5.57-$5.73 per mmBtu for the fuel produced from these are derived from a pre-defined formula detailed in the PSC. 
However, Cairn India's eastern offshore Ravva gas, which is currently priced at $3.5-$4.3 per mmBtu, may be revised as per the committee recommendations. 
The gas price hike proposed falls short of what RIL and its partner BP plc of UK have been seeking. They want domestic gas prices to be freed and benchmarked to the rate at which gas in its liquid form (LNG) is imported into the country. 
Liquefied natural gas (LNG) currently is imported at about $14 per mmBtu. 
Sources said the ministry said the Rangarajan panel report needs to be accepted so that domestically produced natural gas prices are fixed in a fair manner and in a way that incentivises production. 
The panel had suggested taking a weighted average of the US, Europe and Japanese gas hubs or market price and then averaging it with the net imported price of liquefied natural gas (LNG) to give sale price of domestically produced gas. 
The Rangarajan Committee suggested averaging volume-weighted price of gas at US' Henry Hub, UK's NBP and Japan Customs Cleared prices for the trailing 12 months with the net price that producer got from exporting LNG to India on a long-term contract. 
Previously, RIL had from April 2014 wanted to price KG-D6 gas at the rate India pays for importing LNG on a long-term contract from Qatar. India pays 12.67% of the international oil rate plus $0.26 per mmBtu to Qatar. At $100 per barrel oil rate, this translated into a gas price of $12.93. 
The panel headed by C Rangarajan —chairman, Economic Advisory Council to the Prime Minister—also suggested gas-on-gas competition after five years.



Chandragupta Acharya

4 years ago

Since cost-plus formula was used during the initial investment phase in KG Basin, only marginal cost basis should be used now. The developer has already recovered the investment at zero risk. So what is the logic to pay internationally linked prices now?

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