What are the key policy rates used by RBI to influence interest rates?
The key policy or ‘signalling’ rates include the bank rate, the repo rate, the reverse repo rate, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). RBI increases its key policy rates when there is greater volume of money in the economy. In other words, when too much money is chasing the same or lesser quantity of goods and services. Conversely, when there is a liquidity crunch or recession, RBI would lower its key policy rates to inject more money into the economic system.
What is repo rate?
Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. If the central bank wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. The current repo rate is 5.50%.
What is reverse repo rate?
Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks in the short term. Like the repo, this is done by RBI selling government bonds to banks with the commitment to buy them back at a future date. The banks use the reverse repo facility to deposit their short-term excess funds with the central bank and earn interest on it. RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.
What is Cash Reserve ratio?
Cash reserve Ratio (CRR) is the amount of funds that banks have to park with RBI. If RBI decides to increase the cash reserve ratio, the available amount with banks would reduce. The central bank increases CRR to impound surplus liquidity. CRR serves two purposes: One, it ensures that a portion of bank deposits are always available to meet withdrawal demand, and secondly, it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money. The current CRR is 6%.
What is SLR? (Statutory Liquidity Ratio)
Apart from keeping a portion of deposits with RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio. The current SLR is 25%. In times of high growth, an increase in SLR requirement reduces lendable resources of banks and pushes up interest rates.
What is the bank rate?
Unlike other policy rates, the bank rate is purely a signalling rate and most interest rates are delinked from the bank rate. Also, the bank rate is the indicative rate at which RBI lends money to other banks (or financial institutions) The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, longterm interest rates also tend to move up, and vice-versa.
Wednesday, July 7, 2010
Tuesday, July 6, 2010
Monetory Policy
THE Reserve Bank of India has accelerated its planned exit from the crisis-induced extra accommodation of credit demand by raising both the repo and reverse repo rates, each by a quarter of a percentage point, on Friday. The goal, of course, is to tame inflation, which has been adamantly defying gravity for quite some time. While the ongoing exit from the crisis-response monetary policy is fine, the RBI needs to take into account the reality that the bulk of inflation arises from the supply side. Globally as well, commodity prices have gone up quite substantially over the last one year, except in the case of food. The Economist index is up 27% for metals, 38.8% for all industrial commodities. Such rise in global prices cannot but have a sympathetic effect on Indian commodity prices, too. So, just because two-thirds of the wholesale price inflation in May was contributed by non-food products, it does not automatically mean that overheating domestic demand is the reason why these prices have gone up. The official press release says that the RBI takes into account the 1% rise in the wholesale price index arising from the recently announced hike in petro-fuel prices and the second round effects in the months ahead, but does not say what these second order effects would be. To the extent the higher fuel retail prices ease the burden of subsidy on the exchequer, it would reduce the fiscal deficit and the build up of excess demand in the economy. So, some of the second order effects of the petro-fuel hikes definitely would dampen inflation. Similarly, to the extent higher retail prices release oil companies from the need to borrow from the market tens of thousands of crore rupees to finance working capital needs, the move would release credit for other, hopefully investment, purposes. Such extra availability of loanable resources would put a downward pressure on lending rates, regardless of the rise in policy rates.
Concerted moves to hike output and to increase productivity are needed, to combat inflation. A fast-growing economy raises income levels, hiking the demand for everything. The government must facilitate the economy’s traverse to a higher level of efficiency.
Concerted moves to hike output and to increase productivity are needed, to combat inflation. A fast-growing economy raises income levels, hiking the demand for everything. The government must facilitate the economy’s traverse to a higher level of efficiency.
Debate on oil decontrol
THE government has finally hiked the prices of diesel, kerosene and LPG, though by less than recommended by the Kirit Parikh Committee. It has decontrolled petrol, and hopes to decontrol diesel in due course. But its timidity suggests that price controls will return if global oil prices shoot up again.
Financial TV channels had discussions clearly favouring decontrol. But politicians on news channels were overwhelmingly against any price rise. Their objections included exaggerations, halftruths and plain falsehoods.
They said this was a political issue affecting the common man, and could not be treated just as an economic matter. Yet, dozens of countries across the globe have no price controls. The common man in Japan, the Philippines or the US treats changes in petrol and diesel prices as no more political than changes in the price of bananas or eggs. Only when governments impose price control do prices become political, and that’s the best reason for avoiding controls. India had no oil price controls till 1973, and price changes were not seen as political then.
Indian politicians claim that the common man will be pushed into poverty and privation by the price hike, while farmers and agriculture will be ruined. That’s plain wrong, and such claims have no basis either in other country experiences nor India’s own past. The common man faces price changes up and down in any market system. In a non-market communist system, all prices can indeed be controlled forever, but the collapse of the Soviet Union showed how myopic and bankrupt such an approach really was. Price controls can provide shortterm relief to consumers, but act as longer-term disincentives to production and efficiency, the cumulative impact of which toppled communism.
Deng Xiaoping in China moved towards the market fast enough to escape a Soviet-type collapse. Countries without price controls have far outperformed those with controls, in terms of poverty removal no less than GDP growth. Yet, Indian politicians on TV talk as though Soviet-style price controls are the only rational and humane way to manage economies.
Indian politicians claim that price decontrols will spur inflation. But despite price controls, India has 10% wholesale price inflation and 14% consumer price inflation. By contrast, inflation is just 2-3% in the US, Europe, Japan, the Philippines and other countries without price controls, where consumers are paying in full for the doubling of crude price from $40 to $80 a barrel over the last year. Inflation is caused by faulty fiscal, monetary and trade policies, not by price decontrol.
Diesel and petrol have gone up around 5%, which is hardly sensational. Yet Indian politicians say the back of the common man will be broken.
Really? Between 1970 and 1973, crude went up from $1.20 a barrel to $3.65 a barrel, and this tripling was passed on in full to the Indian consumer. Then Opec became an effective oil cartel in 1973-74, and oil shot up to $10 a barrel. Once again, the Indira Gandhi government passed on the rise to the consumer. Obviously it hurt. But the economy adjusted, and agriculturists did not commit suicide.
NEXT came the second oil shock of 1980. Crude tripled from $10 a barrel to $30 a barrel. Again, Indira Gandhi passed on almost all the burden to the consumer. Once again, the consumer adjusted, with no economic collapse or impoverishment. Indeed, poverty started falling for the first time after Independence. Leftists claimed that farmers would be decimated. In fact, the green revolution spread fast after the first oil shock of 1973-74, and again after the second oil shock of 1980. Higher petrol and diesel prices went hand in hand with falling poverty and rising farm production.
Communists are the biggest critics of higher prices, claiming that these are an artificial creation of speculation by ‘international financial capital’. This is eerily Hitlerian. Hitler too claimed that the global economy was controlled and distorted by financiers, who were mainly Jews, and so resorted to mass murder of Jews. Communists perpetrated mass murder of another sort, based on class rather religion, but with as little moral or factual basis.
To be fair, communists are not alone in blaming financial speculation for artificially driving up oil prices. The trading volume of oil futures and derivatives has skyrocketed in the last decade, when prices too skyrocketed before nosediving. Academic studies have investigated the possibility that financial speculation made oil prices especially high and volatile.
But these studies failed to establish a link. Other commodities like iron ore, coal, uranium and cobalt are traded for physical delivery only in the spot market, and have no derivative markets. Yet, the prices of iron ore and coal proved if anything more volatile than that of oil. Iron ore shot up from $40 to over $200 a tonne in the boom.
Why so? Well, 2004-08 witnessed the mother of all booms, with world GDP growing at a record rate. Environmental and safety clearances made the opening of new mines a lengthy process. Hence, commodity supplies could not keep up with demand, and enormous price spikes were the result. The oil price spike was not exceptional. For every financial seller there was necessarily a buyer too, so speculation did not create one-way trends.
Why has trading in oil futures and derivatives skyrocketed? Some of it is pure speculation. But much trading is now related to risk management, both by suppliers and consumers, who hedge against adverse developments by locking in future prices. This constitutes a rational form of insurance. Communists who condemn this blindly as ‘international financial capital speculation’ are simply exposing their ignorance.
These comrades need bogeymen to justify their life-long defence of communist murder and torture in pursuit of a bankrupt economic ideology. Rather than learn from the collapse of the Soviet Union, they would rather use old, hollow slogans to justify the unjustifiable. When exposed by newspapers like this one, they have no factual reply, but repeat empty slogans about the pink press being the voice of international financial capital. How pathetic!
Financial TV channels had discussions clearly favouring decontrol. But politicians on news channels were overwhelmingly against any price rise. Their objections included exaggerations, halftruths and plain falsehoods.
They said this was a political issue affecting the common man, and could not be treated just as an economic matter. Yet, dozens of countries across the globe have no price controls. The common man in Japan, the Philippines or the US treats changes in petrol and diesel prices as no more political than changes in the price of bananas or eggs. Only when governments impose price control do prices become political, and that’s the best reason for avoiding controls. India had no oil price controls till 1973, and price changes were not seen as political then.
Indian politicians claim that the common man will be pushed into poverty and privation by the price hike, while farmers and agriculture will be ruined. That’s plain wrong, and such claims have no basis either in other country experiences nor India’s own past. The common man faces price changes up and down in any market system. In a non-market communist system, all prices can indeed be controlled forever, but the collapse of the Soviet Union showed how myopic and bankrupt such an approach really was. Price controls can provide shortterm relief to consumers, but act as longer-term disincentives to production and efficiency, the cumulative impact of which toppled communism.
Deng Xiaoping in China moved towards the market fast enough to escape a Soviet-type collapse. Countries without price controls have far outperformed those with controls, in terms of poverty removal no less than GDP growth. Yet, Indian politicians on TV talk as though Soviet-style price controls are the only rational and humane way to manage economies.
Indian politicians claim that price decontrols will spur inflation. But despite price controls, India has 10% wholesale price inflation and 14% consumer price inflation. By contrast, inflation is just 2-3% in the US, Europe, Japan, the Philippines and other countries without price controls, where consumers are paying in full for the doubling of crude price from $40 to $80 a barrel over the last year. Inflation is caused by faulty fiscal, monetary and trade policies, not by price decontrol.
Diesel and petrol have gone up around 5%, which is hardly sensational. Yet Indian politicians say the back of the common man will be broken.
Really? Between 1970 and 1973, crude went up from $1.20 a barrel to $3.65 a barrel, and this tripling was passed on in full to the Indian consumer. Then Opec became an effective oil cartel in 1973-74, and oil shot up to $10 a barrel. Once again, the Indira Gandhi government passed on the rise to the consumer. Obviously it hurt. But the economy adjusted, and agriculturists did not commit suicide.
NEXT came the second oil shock of 1980. Crude tripled from $10 a barrel to $30 a barrel. Again, Indira Gandhi passed on almost all the burden to the consumer. Once again, the consumer adjusted, with no economic collapse or impoverishment. Indeed, poverty started falling for the first time after Independence. Leftists claimed that farmers would be decimated. In fact, the green revolution spread fast after the first oil shock of 1973-74, and again after the second oil shock of 1980. Higher petrol and diesel prices went hand in hand with falling poverty and rising farm production.
Communists are the biggest critics of higher prices, claiming that these are an artificial creation of speculation by ‘international financial capital’. This is eerily Hitlerian. Hitler too claimed that the global economy was controlled and distorted by financiers, who were mainly Jews, and so resorted to mass murder of Jews. Communists perpetrated mass murder of another sort, based on class rather religion, but with as little moral or factual basis.
To be fair, communists are not alone in blaming financial speculation for artificially driving up oil prices. The trading volume of oil futures and derivatives has skyrocketed in the last decade, when prices too skyrocketed before nosediving. Academic studies have investigated the possibility that financial speculation made oil prices especially high and volatile.
But these studies failed to establish a link. Other commodities like iron ore, coal, uranium and cobalt are traded for physical delivery only in the spot market, and have no derivative markets. Yet, the prices of iron ore and coal proved if anything more volatile than that of oil. Iron ore shot up from $40 to over $200 a tonne in the boom.
Why so? Well, 2004-08 witnessed the mother of all booms, with world GDP growing at a record rate. Environmental and safety clearances made the opening of new mines a lengthy process. Hence, commodity supplies could not keep up with demand, and enormous price spikes were the result. The oil price spike was not exceptional. For every financial seller there was necessarily a buyer too, so speculation did not create one-way trends.
Why has trading in oil futures and derivatives skyrocketed? Some of it is pure speculation. But much trading is now related to risk management, both by suppliers and consumers, who hedge against adverse developments by locking in future prices. This constitutes a rational form of insurance. Communists who condemn this blindly as ‘international financial capital speculation’ are simply exposing their ignorance.
These comrades need bogeymen to justify their life-long defence of communist murder and torture in pursuit of a bankrupt economic ideology. Rather than learn from the collapse of the Soviet Union, they would rather use old, hollow slogans to justify the unjustifiable. When exposed by newspapers like this one, they have no factual reply, but repeat empty slogans about the pink press being the voice of international financial capital. How pathetic!
Base Rate in Banks
THE Indian banking industry is stepping into an age of probable transparency in lending to customers with the new base rate regime, as the Reserve Bank of India (RBI) corrects its past mistake and in the process raises the prospect of a more effective monetary policy.
Nearly 80 banks, ranging from the nation’s biggest—State Bank of India—to the only locally-listed foreign bank—Standard Chartered—will now stop lending below 7%, even if it is to a blue chip, some of which were paying lower than funding costs. The base rates range between 7% and 8.75%, and can differ among banks since costs vary.
The base rate—the floor below which a bank cannot lend even to its top-most client—is arrived after factoring in a bank’s cost of funds and other operating expenses. It is effective Thursday and replaces the muchabused benchmark prime lending rate (PLR).
“The base rate will be transparent,’’ said SBI chairman OP Bhatt. ``Credit will henceforth revolve around the base rate as it will be the reference rate over which all loans will be priced and it will succeed in monetary transmission.”
A central bank panel in October last had recommended the new system after finding that banks, mostly private sector ones, were not passing on the reduction in policy rates to customers while they were quick to act whenever rates climbed. That blunted monetary policy actions. The lack of transparency in lending also led to accusations that small companies and retail customers were subsiding the so-called triple A customers.
`Prime lending rates continued to be rigid and inflexible in relation to the overall direction of interest rates in the economy,’’ the panel had said. An issue often raised is ``the asymmetric downward stickiness of BPLRs. This not only raises an issue of equity, but also result in poor transmission of monetary policy in credit markets’’.
The main reason for the lack of transparency and cross-subsidising by banks can be traced back to the central bank’s decision in 2001 to allow banks to lend below benchmark rates. That was after banks represented they need a provision to lend below the prime rates since it was an international practice. With many international practices now discarded after the credit crisis, the sub-PLR rate too goes.
After SBI, with a fifth of the market share, fixed its base rate at 7.5% on Tuesday, HDFC Bank on Wednesday set it at 7.25%, and Axis Bank and ICICI Bank at 7.5%. Most staterun banks have set it at 8% while Corporation Bank’s is at 7.75%.
The base rates of Thrissur-based Dhanalaxmi Bank at 7% and Mangaloreheadquartered Karnataka Bank at 8.75% are at the two ends of the range.
Although customers are expected to benefit from the new regime, they may not move in hordes seeking lower rates as many factors such as customer service, branch proximity and comfort levels play a significant role in choosing a bank.
A NEW BEGINNING
BASE FACTORS
The base rate factors in a bank’s cost of funds, profit margin and administrative costs. Risk premium is charged over and above the base rate.
BASE CAUSE
The failure of the PLR system to transmit monetary policy changes forced the central bank to introduce the base rate. This was particularly evident in home loans, where existing customers failed to benefit from a fall in rates.
BASE EFFECT
Top corporates, who currently get the best rates, may bargain for loans at the base rate, or closer to it. But for short-term loans, they will have to tap the commercial paper route or the bond market. For most banks, the migration is unlikely to impact their net interest margin — the difference between the interest earned on deposits and cost of deposits. RATE CARD BASE RATES FIXED BY LEADING BANKS
7% Dhanlaxmi Bank, DBS Bank India 7.25% HDFC Bank 7.5% SBI, Axis Bank 7.75% Corporation Bank, State Bank of Mysore, Federal Bank 8% BoB, OBC, Allahabad Bank, BoI, Indian Bank, IDBI Bank, UCO Bank, PNB 8.25% Syndicate Bank, Dena Bank, IOB 8.5% Karur Vysya Bank 8.75% Karnataka Bank 11-13.75% Range of existing benchmark prime lending rate that will end today Customer loyalty may be tested
MANY of these players have been banking with us for a long time and are loyal to us,’’ said KSR Anjaneyulu, MD & CEO of Lakshmi Vilas Bank, referring to small companies and traders. “This segment of customers is unlikely to be impacted significantly by a 0.25-0.5% rise in interest rates.”
But that claim of customer loyalty may be tested in the next few months as SBI looks set to lure customers with teaser rates even as rivals who pioneered them are bidding adieu to the scheme. It has extended the special home loan scheme for three more months till September 30 while HDFC and ICICI Bank have ended it.
The SBI scheme offers a fixed rate of 8% in the first year and 9% in the second and third years irrespective of the loan amount. It floats from the fourth year with market rates. SBI’s home loan portfolio grew 31.5% last year to Rs 73,400 crore. “We are not looking at increasing market share at the cost of our profitability,” the bank’s chairman said.
Investors believe that migration to the base rate may not impact the profitability of banks since they are factoring in the costs. “There would be no change in the net interest margins,’’ said Vaibhav Agrawal, VP-research, banking, Angel Broking. ``We are not re-rating the banking stocks under our watch.”
There is room till December to tweak, if the formula does not work.
`We do not know how the base rate will play out,’’ said Mr Bhatt. `RBI has enabled us to change it once. If there is anything wrong with the methodology, it can be corrected.”
Nearly 80 banks, ranging from the nation’s biggest—State Bank of India—to the only locally-listed foreign bank—Standard Chartered—will now stop lending below 7%, even if it is to a blue chip, some of which were paying lower than funding costs. The base rates range between 7% and 8.75%, and can differ among banks since costs vary.
The base rate—the floor below which a bank cannot lend even to its top-most client—is arrived after factoring in a bank’s cost of funds and other operating expenses. It is effective Thursday and replaces the muchabused benchmark prime lending rate (PLR).
“The base rate will be transparent,’’ said SBI chairman OP Bhatt. ``Credit will henceforth revolve around the base rate as it will be the reference rate over which all loans will be priced and it will succeed in monetary transmission.”
A central bank panel in October last had recommended the new system after finding that banks, mostly private sector ones, were not passing on the reduction in policy rates to customers while they were quick to act whenever rates climbed. That blunted monetary policy actions. The lack of transparency in lending also led to accusations that small companies and retail customers were subsiding the so-called triple A customers.
`Prime lending rates continued to be rigid and inflexible in relation to the overall direction of interest rates in the economy,’’ the panel had said. An issue often raised is ``the asymmetric downward stickiness of BPLRs. This not only raises an issue of equity, but also result in poor transmission of monetary policy in credit markets’’.
The main reason for the lack of transparency and cross-subsidising by banks can be traced back to the central bank’s decision in 2001 to allow banks to lend below benchmark rates. That was after banks represented they need a provision to lend below the prime rates since it was an international practice. With many international practices now discarded after the credit crisis, the sub-PLR rate too goes.
After SBI, with a fifth of the market share, fixed its base rate at 7.5% on Tuesday, HDFC Bank on Wednesday set it at 7.25%, and Axis Bank and ICICI Bank at 7.5%. Most staterun banks have set it at 8% while Corporation Bank’s is at 7.75%.
The base rates of Thrissur-based Dhanalaxmi Bank at 7% and Mangaloreheadquartered Karnataka Bank at 8.75% are at the two ends of the range.
Although customers are expected to benefit from the new regime, they may not move in hordes seeking lower rates as many factors such as customer service, branch proximity and comfort levels play a significant role in choosing a bank.
A NEW BEGINNING
BASE FACTORS
The base rate factors in a bank’s cost of funds, profit margin and administrative costs. Risk premium is charged over and above the base rate.
BASE CAUSE
The failure of the PLR system to transmit monetary policy changes forced the central bank to introduce the base rate. This was particularly evident in home loans, where existing customers failed to benefit from a fall in rates.
BASE EFFECT
Top corporates, who currently get the best rates, may bargain for loans at the base rate, or closer to it. But for short-term loans, they will have to tap the commercial paper route or the bond market. For most banks, the migration is unlikely to impact their net interest margin — the difference between the interest earned on deposits and cost of deposits. RATE CARD BASE RATES FIXED BY LEADING BANKS
7% Dhanlaxmi Bank, DBS Bank India 7.25% HDFC Bank 7.5% SBI, Axis Bank 7.75% Corporation Bank, State Bank of Mysore, Federal Bank 8% BoB, OBC, Allahabad Bank, BoI, Indian Bank, IDBI Bank, UCO Bank, PNB 8.25% Syndicate Bank, Dena Bank, IOB 8.5% Karur Vysya Bank 8.75% Karnataka Bank 11-13.75% Range of existing benchmark prime lending rate that will end today Customer loyalty may be tested
MANY of these players have been banking with us for a long time and are loyal to us,’’ said KSR Anjaneyulu, MD & CEO of Lakshmi Vilas Bank, referring to small companies and traders. “This segment of customers is unlikely to be impacted significantly by a 0.25-0.5% rise in interest rates.”
But that claim of customer loyalty may be tested in the next few months as SBI looks set to lure customers with teaser rates even as rivals who pioneered them are bidding adieu to the scheme. It has extended the special home loan scheme for three more months till September 30 while HDFC and ICICI Bank have ended it.
The SBI scheme offers a fixed rate of 8% in the first year and 9% in the second and third years irrespective of the loan amount. It floats from the fourth year with market rates. SBI’s home loan portfolio grew 31.5% last year to Rs 73,400 crore. “We are not looking at increasing market share at the cost of our profitability,” the bank’s chairman said.
Investors believe that migration to the base rate may not impact the profitability of banks since they are factoring in the costs. “There would be no change in the net interest margins,’’ said Vaibhav Agrawal, VP-research, banking, Angel Broking. ``We are not re-rating the banking stocks under our watch.”
There is room till December to tweak, if the formula does not work.
`We do not know how the base rate will play out,’’ said Mr Bhatt. `RBI has enabled us to change it once. If there is anything wrong with the methodology, it can be corrected.”
Monday, July 5, 2010
Impact of fuel price rises?????
India has moved to ease price controls on petrol and raised other fuel rates, and Prime Minister Manmohan Singh signalled his resolve to push bold reforms with intentions to free up diesel prices at a later date.
Here are some questions and answers about the implications of the fuel price rises.
WHAT WILL BE THE POLITICAL IMPACT?
Opposition parties will likely try to block legislation in the next parliament session by seeking support from the ruling Congress party's coalition allies.
Congress could be hit in state elections, including West Bengal and Tamil Nadu, in early 2011. But the rises come months before the votes and voter backlash can be mitigated by using savings from fuel price deregulation to boost social spending.
There is also an escape clause. The government has already said it would intervene if crude prices rise sharply. What sharply means is unclear and it could be used politically to justify a new increase in subsidies.
The protests are seen as a test of the opposition's mettle, having struggled to find its feet after electoral defeat last year. The strike call has drawn a mixed response, with parts of opposition-controlled states at a near standstill amid violent protests while other areas remained relatively untouched.
WHAT WILL BE THE IMPACT ON INDIA'S RETAIL OIL MARKET?
State firms such as Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd, which control more than 95 percent of about 40,000 refined fuel pumps in India, are likely to lose market share.
Reliance Industries Ltd., which operates the world's biggest refining complex at Jamnagar, is expected to revive all its pumps, which were shut down five years ago when the government started subsidising fuel sold by state firms. Essar Oil is also expanding its retail network.
HOW SOON WILL PRIVATE FIRMS EXPAND RETAIL NETWORKS?
The government has only freed the price of petrol, which accounts for about 10 percent of oil products sold. The government has said it will also free up diesel, used by trucks, buses and a growing number of cars, and which accounts for more than a third of the oil consumed. Private firms will speed up retail expansion once price controls on diesel are removed.
Essar has said it plans to increase its retail network to 1,700 by end-March from 1,342.
WHAT IS THE EXTENT OF THE PRICE RISE?
Domestic fuels are taxed differently by the states. In New Delhi, petrol prices were raised by 7.3 percent, diesel by 5.2 percent, kerosene by 32.5 percent and LPG by 11.3 percent.
HOW WILL PETROL PRICES BE SET?
Companies will fix their own prices. This could see more competition in the retail sector and eventually push down prices.
HOW WILL IT IMPACT EXPORTS OF OIL PRODUCTS?
Exports may fall. As Reliance increases domestic sales, it may reduce exports from its 660,000 bpd plant to sell to the domestic market, which is usually more lucrative.
HOW DOES IT IMPACT THE FINANCES OF OIL FIRMS?
State firms will gain from market rates of petrol and higher prices of diesel. Before the price rises, state-run retailers were expecting a revenue loss of $24.4 billion this year, based on an average crude price of $85 a barrel.
WILL ISSUANCES AFFECT THE BOND MARKETS?
No. Oil companies issue bonds to borrow money from the corporate bond market largely to finance a shortfall in working capital on selling fuel below cost. However, dealers have said that bond issuances by oil companies will now come down because they will have more cash in their books after the move to raise domestic fuel prices.
WILL INFLATION STAY AT ELEVATED LEVELS?
Yes. That is very likely. The Finance Ministry's chief economic adviser, Kaushik Basu, said the price rises would impact headline inflation by 0.9 percentage points.
Analysts have also estimated that the price increases may lead to a rise in headline inflation of more than 100 basis points with a lag of a few weeks. A senior government official said June headline inflation could even touch 11 percent.
But forecasts from the Indian Meteorological Department suggest that rains this year are expected to be normal, which should bring down food prices and inflation. The central bank expects headline inflation to ease to 5.5 percent by the end of this financial year.
HOW DOES IT IMPACT RATE EXPECTATIONS IN THE MARKETS?
The fuel price rise will likely aggravate existing double digit inflationary pressure, which already prompted the central bank to a surprise 25 basis points rise on Friday citing worries over prices of fuel and manufactured goods.
Markets are expecting another rate rise in a July 27 policy review, of at least 25 basis points. However, Finance Minister Pranab Mukherjee may have clouded predictions of the bank's next step, saying the latest rise could be "subsumed" at the review.
TO WHAT EXTENT WILL THE FISCAL DEFICIT COME DOWN?
With windfall gains from the sale of telecom spectrum and a lower fuel subsidy bill the government expects the fiscal deficit this financial year to ease to about 4.5 percent of gross domestic product from 6.7 percent.
Here are some questions and answers about the implications of the fuel price rises.
WHAT WILL BE THE POLITICAL IMPACT?
Opposition parties will likely try to block legislation in the next parliament session by seeking support from the ruling Congress party's coalition allies.
Congress could be hit in state elections, including West Bengal and Tamil Nadu, in early 2011. But the rises come months before the votes and voter backlash can be mitigated by using savings from fuel price deregulation to boost social spending.
There is also an escape clause. The government has already said it would intervene if crude prices rise sharply. What sharply means is unclear and it could be used politically to justify a new increase in subsidies.
The protests are seen as a test of the opposition's mettle, having struggled to find its feet after electoral defeat last year. The strike call has drawn a mixed response, with parts of opposition-controlled states at a near standstill amid violent protests while other areas remained relatively untouched.
WHAT WILL BE THE IMPACT ON INDIA'S RETAIL OIL MARKET?
State firms such as Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd, which control more than 95 percent of about 40,000 refined fuel pumps in India, are likely to lose market share.
Reliance Industries Ltd., which operates the world's biggest refining complex at Jamnagar, is expected to revive all its pumps, which were shut down five years ago when the government started subsidising fuel sold by state firms. Essar Oil is also expanding its retail network.
HOW SOON WILL PRIVATE FIRMS EXPAND RETAIL NETWORKS?
The government has only freed the price of petrol, which accounts for about 10 percent of oil products sold. The government has said it will also free up diesel, used by trucks, buses and a growing number of cars, and which accounts for more than a third of the oil consumed. Private firms will speed up retail expansion once price controls on diesel are removed.
Essar has said it plans to increase its retail network to 1,700 by end-March from 1,342.
WHAT IS THE EXTENT OF THE PRICE RISE?
Domestic fuels are taxed differently by the states. In New Delhi, petrol prices were raised by 7.3 percent, diesel by 5.2 percent, kerosene by 32.5 percent and LPG by 11.3 percent.
HOW WILL PETROL PRICES BE SET?
Companies will fix their own prices. This could see more competition in the retail sector and eventually push down prices.
HOW WILL IT IMPACT EXPORTS OF OIL PRODUCTS?
Exports may fall. As Reliance increases domestic sales, it may reduce exports from its 660,000 bpd plant to sell to the domestic market, which is usually more lucrative.
HOW DOES IT IMPACT THE FINANCES OF OIL FIRMS?
State firms will gain from market rates of petrol and higher prices of diesel. Before the price rises, state-run retailers were expecting a revenue loss of $24.4 billion this year, based on an average crude price of $85 a barrel.
WILL ISSUANCES AFFECT THE BOND MARKETS?
No. Oil companies issue bonds to borrow money from the corporate bond market largely to finance a shortfall in working capital on selling fuel below cost. However, dealers have said that bond issuances by oil companies will now come down because they will have more cash in their books after the move to raise domestic fuel prices.
WILL INFLATION STAY AT ELEVATED LEVELS?
Yes. That is very likely. The Finance Ministry's chief economic adviser, Kaushik Basu, said the price rises would impact headline inflation by 0.9 percentage points.
Analysts have also estimated that the price increases may lead to a rise in headline inflation of more than 100 basis points with a lag of a few weeks. A senior government official said June headline inflation could even touch 11 percent.
But forecasts from the Indian Meteorological Department suggest that rains this year are expected to be normal, which should bring down food prices and inflation. The central bank expects headline inflation to ease to 5.5 percent by the end of this financial year.
HOW DOES IT IMPACT RATE EXPECTATIONS IN THE MARKETS?
The fuel price rise will likely aggravate existing double digit inflationary pressure, which already prompted the central bank to a surprise 25 basis points rise on Friday citing worries over prices of fuel and manufactured goods.
Markets are expecting another rate rise in a July 27 policy review, of at least 25 basis points. However, Finance Minister Pranab Mukherjee may have clouded predictions of the bank's next step, saying the latest rise could be "subsumed" at the review.
TO WHAT EXTENT WILL THE FISCAL DEFICIT COME DOWN?
With windfall gains from the sale of telecom spectrum and a lower fuel subsidy bill the government expects the fiscal deficit this financial year to ease to about 4.5 percent of gross domestic product from 6.7 percent.
Subscribe to:
Comments (Atom)