BofA-ML sees diesel price hike adding 120 bps to inflation

According to BofA-ML India chief economist Indranil Sen Gupta, inflation should persist around 7% in the March quarter, which will then likely go back up to 7.5-8% in second half of 2013

Mumbai: Bank of America-Merrill Lynch (BofA-ML) has said the recent partial diesel price hike will inflict a 1.20% burden on the already sticky inflation and that the price index will remain elevated throughout the next fiscal, reports PTI.


“The bottomline is that inflation will follow an inverted U in FY14, after last week’s diesel price hikes that will add 120 basis points (bps) to FY14 inflation.”


“Inflation should persist around 7% in the March quarter, which will then likely go back up to 7.5-8% in second half of 2013. But it should abate to 6.5-7% by March 2014,” BofA-ML India chief economist Indranil Sen Gupta said in a note.


However, the American brokerage said it continues to expect the Reserve Bank of India (RBI) to cut policy rates by 25 bps on 29th January. It is likely to be cut by 75 bps by June, then pause in the second half as inflation picks up and cut another 50 bps again in the March 2014 quarter as inflation subsides.


The government allowed oil marketing companies to increase the retail price of the fuel by 50 paise per every month and ended subsidy on bulk and institutional diesel consumers like railways, state road transport corporations and to power plants. The current subsidy on diesel stands at Rs 9.50 to a litre.


Gupta said, “We expect inflation to persist at 7%-7.5% in the March quarter after the diesel price hike. And accordingly we hike our March 2013 inflation forecast to 7.3% from 7.1%.”


On the impact of the staggered diesel price hike, it said the move will add about 120 bps to FY14 inflation if crude remains at $110 per barrel.


However, on the positive side, Gupta said, the price hike will help the government trim its oil subsidy by Rs20,000 crore to Rs67,300 crore (assuming a rupee value of 54 to the dollar).


Stating that the long tightening by the RBI has begun to turn counter-productive, he said “We cannot deny that the RBI tightening is increasingly turning counter-productive in hurting growth rather than denting an inflation that is largely ‘imported’.”


Finance Ministry favours real estate, broking firms to set up banks

Finance Ministry has said that real estate companies and broking firms can be allowed to open new bank, but there should be complete ban on taking exposure in the group companies or entities related to promoters

New Delhi: The Finance Ministry has expressed the view that the Reserve Bank of India (RBI) should allow real estate companies and broking firms to set up banks as adequate safeguards will be there to prevent exposure of promoters to related entities, reports PTI.


In its comments to RBI on the giving out new bank licences, the ministry has said that such entities can be allowed, but there should be complete ban on taking exposure in the group companies or entities related to promoters, sources said.


Even the vendor and large customers of such promoters can't get loan from the new bank, sources said, adding that this move will minimise accumulation of risk.


So, the firewall has been proposed to avoid undue influence of bank CEO to lend to the group companies, they added.


As per the RBI's draft norms for licensing of new banks in the private sector released in 2011, "entities or groups having significant (10% or more) income or assets or both from real estate construction and or broking activities individually or taken together in the last three years will not be eligible".


Explaining rationale for not permitting such entities, the RBI's draft guidelines said, there are certain activities, such as real estate and capital market activities, in particular broking activities which, apart from being inherently riskier, represent a business model and business culture which are quite misaligned with a banking model.


Post-crisis, it said, there are concerted moves even internationally to separate banking from proprietary trading.


"More importantly, in India, past experience with brokers on the boards of banks has not been satisfactory. It will therefore be necessary to ensure that any entity/ group undertaking such activities on a significant scale is not considered for a bank licence," the guidelines added.


The Finance Ministry has also suggested that the non-operative holding company (NOHC) may be substituted by the non-operative financial holding company (NOFHC) to signify that only financial sector entities are part of the NOFHC.


RBI will regulated financial holding company and different entities under the holding company will be regulated as per the business they carry out, sources said.


In its recommendations, the ministry has also proposed to lift the ban on setting up of new financial services entities under the NOFHC for at least three years from the date of commencement.


It has also favoured RBI's proposal of opening 25% of branches in unbanked areas of the country.


"The bank shall open at least 25% of its branches in unbanked rural centres (population up to 9,999 as per 2001 census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence," the draft guidelines had said.



R Balakrishnan

5 years ago

I think the real estate companies have been suggested because of the highest level of ethics they follow in business, much like the stock broking community in India. Kudos to RBI for straight thinking.


5 years ago

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Inflation still high, no room for monetary stimulus: RBI

Notwithstanding expectations of interest rate cut by the RBI in its quarterly monetary policy on 29th January on back of declining inflation, RBI governor D Subbarao said, “Inflation has come down, (it is) still high”

Lucknow: Ahead of its third quarterly policy, the Reserve Bank of India (RBI) has said that inflation was still high and there was no room for fiscal or monetary stimulus to boost growth in slowing economy, reports PTI.


“When growth is slowing down you can stimulate the economy either by monetary easing or by fiscal stimulus, but both monetary and fiscal side have no room for stimulus. So that is the big concern,” RBI governor D Subbarao said while addressing Indian Institute of Management (IIM) students on Tuesday evening in the capital of north Indian state Uttar Pradesh.


Notwithstanding expectations of interest rate cut by the RBI in its quarterly monetary policy on 29th January on back of declining inflation, Subbarao said, “Inflation has come down, (it is) still high”.


Although inflation, based on movement in wholesale prices, touched the three-year low of 7.18% in December, retail inflation continued to remain in double digit at 10.56%. It only indicates that easing Wholesale Price Index (WPI) was not providing any relief to the consumers from spiralling prices.


The WPI inflation at 7.18% was also much above the central bank’s comfort level of 4%-5%. The inflation has not declined to the expected levels despite tight monetary stance pursued by the RBI to check price rise.


With industrial output contracting by 0.1% in November, the industry has stepped up its demand for interest rate cut by the RBI in its forthcoming policy.


The economic growth, which slipped to nine-year low of 6.5% in 2011-12, is expected to decline further to 5.7%-5.9% in the current fiscal.


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