Care Ratings warns India of ‘crude’ shock

“The easing of monetary policy will have to be reviewed in case (oil) prices start going up. Our country in particular will be affected by just not higher inflation and trade deficit, but also on subsidies which seems to be a fairly sticky account in the government’s budget,” a report by CARE Ratings said

Mumbai: If crude oil prices continue to rise, India will be impacted by not only higher inflation and trade deficit, but by on subsidies, and any move towards easing monetary policy will have to take this into consideration, reports PTI quoting rating agency Care.

“The easing of monetary policy will have to be reviewed in case (oil) prices start going up. Our country in particular will be affected by just not higher inflation and trade deficit, but also on subsidies which seems to be a fairly sticky account in the government’s budget,” a report by the rating agency said.

Noting that the country consumed about 3.6 million barrels per day in the fourth quarter of the last fiscal, the report said it is increasing every year.

Higher price of crude has dual impacts. First it increases the trade deficit which has foreign exchange rate implications, which by itself will pressurise the price level.

Second, on account of the high oil subsidy, there will be pressure on the government to either raise the subsidy level or increase market prices of controlled products, it said.

“If the government prefers to up subsidy, fiscal deficit is bound to expand, and if it opts for the latter (retail price hike), an inflationary impact is unavoidable.” 

After 13 successive rate hikes beginning March, 2010 through October 2011 to fight inflation, the Reserve Bank of India (RBI) has hinted at a pause to the rate hike cycle and on 24th January, it left all the key rates unchanged and cut the cash reserve requirements of bank to 5.5% from 6%.

Inflation, after hovering at near double-digit mark for nearly 20 months, eased to 6.55% in January and is likely to stay below 7% for the fiscal end in March.

But this consistent anti-inflationary stance had its impact on growth, which has tumbled and is projected to close fiscal under 7%.

The government, early this month, revised downwards the gross domestic product (GDP) forecast to a paltry 6.9% from an initial projection of 9% plus.

Similarly, as tax collections petered off due to a massive slowdown in industrial output, the government had to borrow more from the markets, pushing up fiscal deficit by nearly 100 basis points to over 5.6%.

Similar is the case with current account deficit (CAD) which has gone up following weak exports and robust imports.

The CAD is set to jump over 3.5% this year.

The petroleum subsidy bill was projected to be Rs23,640 crore in FY11-12 and may increase even further.

“Mineral oils have a weight of 9.4% in the wholesale price index of which the controlled products have a weight of 6.4%. Higher inflation will definitely come in the way of the expected interest rates, easing the path of RBI in the next financial year,” the report said.

The oil marketing companies, too, would be under pressure, depending on the extent to which they have to bear the burden of sharing of the overall cost, it said.

The Iranian crisis and the impact on oil prices pose probably the biggest risks to global economic recovery this year. While the link between higher oil prices and global growth has diluted over time, the pressure on prices and hence economic policy, is still significant, the Care report added.

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Forex reserves decline by $10.5 billion in September: RBI

“The forex reserves stood at $304.8 billion as at end-March 2011. It increased to the peak level of $322 billion as at end-August 2011. Thereafter, it came down to $311.5 billion at the end of September 2011”, the RBI said in its report on management of foreign exchange reserves

Mumbai: India’s foreign exchange reserves declined by as much as $10.5 billion in the one month ending September 2011 mainly due to the impact of the central bank’s policy to intervene in the currency market to contain volatility, reports PTI.

“The (forex) reserves stood at $304.8 billion as at end-March 2011. It increased to the peak level of $322 billion as at end-August 2011. Thereafter, it came down to $311.5 billion at the end of September 2011”, the Reserve Bank of India (RBI) said in its report on management of foreign exchange reserves.

The movements in the Foreign Currency Assets (FCA), the report said, “occur mainly on purchases and sales of foreign exchange by the RBI in the foreign exchange market in India, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the central government and the effects of revaluation of assets”.

On the net basis, during the six-month period ending September 2011, foreign exchange reserves went up by $6.7 billion to $311.5 billion.

The decision of the RBI to intervene in the foreign exchange market to arrest the declining value of rupee too led to decline in forex reserves.

The value of the India currency which had declined to over Rs53 to a dollar has now stabilised at below Rs50.

The revaluation refers to the impact of exchange rate movement of international currencies vis-a-vis the US dollar on the country’s foreign exchange reserves.

Although both US dollar and euro are intervention currencies, the Foreign Currency Assets (FCA) are maintained in several major currencies like US dollar, Euro, Pound Sterling, Japanese Yen but expressed in US dollars.

Reflecting deterioration in the adequacy of forex reserves, the report further said that at the end of September 2011, the import cover provided by the reserves, “declined to 8.5 months from 9.6 months at end-March 2011.” 

Also, it added, the ratio of short-term debt to the foreign exchange reserves which was 21.3% at end-March 2011 increased to 23% at end-September 2011.

The ratio of volatile capital flows (defined to include cumulative portfolio inflows and short-term debt) to the reserves increased from 67.3% as at end-March 2011 to 68.3% as at end-September 2011, it added.

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ONGC stake sale on 1st March; floor price fixed at Rs290 a share

The Centre on Tuesday decided to offload 5% stake in ONGC on 1st March through auction route at a floor price of Rs290 a share that could fetch the exchequer about Rs12,000-Rs13,000 crore. The floor price for the sale has been fixed at Rs290 per share

New Delhi: Running against time to meet the Rs40,000 crore disinvestment target, the Centre on Tuesday decided to offload 5% stake in ONGC on 1st March through auction route at a floor price of Rs290 a share that could fetch the exchequer about Rs12,000-Rs13,000 crore, reports PTI.

“The ONGC stake sale through the auction route (will take place) in couple of days,” oil minister Jaipal Reddy told reporters after a meeting of the Empowered Group of Ministers (EGoM) which was chaired by finance minister Pranab Mukherjee.

“The floor price for the sale has been fixed at Rs290 per share,” ONGC said in a late night filing to NSE. The floor price, the minimum price for selling a share, is over 2% higher than ONGC’s closing price of Rs283.05 on NSE and Rs283.55 on BSE.

The auction will be between 9.15 am and 3.30 pm.

The government owns 74.14% stake in ONGC and proposes to offload 427.77 million shares or 5% equity. The sale may fetch the hard-pressed government about Rs12,000-Rs13,000 crore this fiscal.

The shares would be sold to institutional as well as retail investors on the “price priority” basis.

Six brokers including Citigroup Global Markets India, Morgan Stanley India Company and DSP Merrill Lynch will manage the share sale.

The auction route or “offer for sale of shares by promoters” involves very little paperwork and the whole process can be done within one trading day.

Capital market regulator Securities and Exchange Board of India (SEBI) had issued norms allowing promoters to sell stake by way of auction, through a separate window on BSE and the NSE, which has to be completed within a day.

This is the second disinvestment this fiscal, after mopping up Rs1,145 crore through stake sale in Power Finance Corporation. The government envisages to raise Rs40,000 crore through disinvestments this fiscal.

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