Companies & Sectors
CCEA approves hike in natural gas price to $8.4 per mmBtu
The Cabinet Committee for Economic Affairs on Thursday approved the proposal to hike the natural gas price to $8.4mmBtu from the current $4.2 per mmBtu with effect from April 2014
Biting the bullet, the government on Thursday approved near doubling of natural gas prices to $8.4 per million metric British thermal unit (mmBtu) from 1st April next year, a move which will result in rise in power tariff, urea cost and CNG prices.
This will be the first revision in gas prices in three years.
The Cabinet Committee on Economic Affairs (CCEA) headed by prime minister Manmohan Singh approved the oil ministry’s proposal to price all domestically produced natural gas as per a complex formula suggested by a panel headed by Prime Minister’s economic advisor C Rangarajan, a top source said.
When contacted, oil minister M Veerappa Moily said: “The CCEA has approved Rangarajan panel formula for pricing of gas. It will be applicable from 1 April 2014 and will be valid for five years.”
The new price will apply uniformly to all producers, be it state-owned firms like Oil and Natural Gas Corporation (ONGC) or private sector Reliance Industries (RIL). While it was previously said the new rates would apply to regulated or APM gas produced by firms like ONGC immediately, the pricing as per Rangarajan formula will come into effect from 1 April 2014, just when RIL’s KGD6 formula of $4.2 per mmBtu runs out.
The Rangarajan formula would be applicable for five years.
The Rangarajan formula uses long-term and spot liquid gas (LNG) import contracts as well as international trading benchmarks to arrive at a competitive price for India.
While the Rangarajan panel had recommended revising domestic gas prices every month based, the oil ministry changed it to a quarterly revision.
Though the average of the two currently comes to $6.775, the price of gas in April next year when these guidelines will come into effect would be around $8.42 and over $10 in the following year. This is because Petronet’s deal with Qatar’s RasGas (India’s only functional long-term LNG contract) has a price-cap which lifts in January 2014, linking gas prices fully with crude.
While RIL’s KG-D6 gas price was fixed in 2007 at $4.205 per mmBtu for first five years of production, APM gas rates were last revised in June 2010 when prices were raised to $4.2 from $1.79. RIL began production from its eastern offshore KG-D6 field in April 2009.



Dayananda Kamath k

3 years ago

this is how they want to control inflation. and benefit the reliance group during election year. all policy decisions are taken based on lobbying than public good.

Rupee likely to remain weak; financial stability will remain RBI’s focus

Nomura’s latest forex report on India says that the rupee is likely to remain weak, with very few tools available at the disposal of the RBI

Nomura estimates that despite net portfolio outflows of $6.7 bilion, largely from debt over the last month, foreign positioning in India in equity remains high. In fact, foreign equity ownership actually rose about 0.4% in June.

While it is commonly perceived that the recent depreciation of the rupee by about 9% against the dollar has brought it closer to its fair value, Nomura’s analysis shows that it is still overvalued by about 17.6%. Higher import prices from the rupee’s weakness are likely to keep the Reserve Bank of India (RBI) on hold for some time, lowering growth expectations and limiting foreign equity flows.

The fact that the rupee has breached the 60-mark could elicit a government response soon. Without solid reform, Nomura expects the rupee to remain weak. One suggestion it offers that can be implemented quickly and lead to a sharp halt in the rupee depreciation is an announcement of a large NRI bond issuance.

Nomura expects India's current account deficit to ease out to 4.3% of GDP in 2014 from 5% in 2013 due to lower gold imports, maintaining, however, that financing the deficit is going to be an immense challenge. The steadily worsening external vulnerability indicators suggest that the RBI has little agency to exercise. Aggressive intervention would only increase the vulnerability of further capital outflows.

The brokerage suggests real sector reforms such as clarity on gas pricing policy, raising FDI limits in certain sectors and relaxing external commercial borrowing limits further.

Nomura's expectations for the next few months are bleak, with a weak currency increasing imported cost inflation and hurting the corporate sector with un-hedged loans.
Domestic supply-side constraints, weak global demand and inelastic imports make it unlikely that even a weak currency could substantially help the trade deficit. Financial stability is likely to be of primary concern to the RBI, with a possible delay in rate cuts and tighter liquidity further hurting the prospects of domestic growth.


“Interest rates hikes are not the solution, cannot afford food security bill”

Prudent fiscal policy combined with structural reform is the way forward and the Indian economy simply cannot afford the Food Security Bill, says Nomura

The sharp downturn that the rupee’s trajectory has taken recently has sparked off concerns about an interest rate hike as a possible policy response. The rationale for that would be to raise interest rates to contain aggregate demand to address the current account deficit and attract more capital inflows in order to help the balance of payment.

According to Nomura however, conventional theory may not be applicable to India's present macro-economic situation for three reasons. For one, Nomura says that the problem that needs to be addressed is not one of a high aggregate demand, but of a lack of supply. Next, it remains debatable as to whether capital flows into India are growth or interest sensitive. Finally, domestic demand has already collapsed, with non-oil/non-gold imports declining, suggesting the presence of weak private demand. Nomura says that the cost of hiking interest rates could do more harm than good, given rising domestic leverage on corporate balance sheets and their inter-linkage with banks.

Nomura invokes the theory of the impossible trinity, according to which a country can only have two out of the three from among an open capital account, a fixed exchange rate and an independent monetary policy. Given a low risk of capital controls, Nomura holds that the Reserve Bank of India (RBI) will have to decide between letting the currency adjust on its own or losing control over its monetary policy. Nomura’s recommendation is that the RBI should let currency adjust gradually, given limited forex reserves and a dismal domestic growth outlook.

Nomura says that while the competitive gains of the rupee depreciation are limited by supply-side considerations, the negative implications of higher imported inflation, delayed rate cuts, high asset price volatility, the increased cost of foreign currency debt, etc are many.

Nomura's report suggests that India's issues stem from a lack of fiscal and structural reform, with the rupee depreciation being a by-product of that. The brokerage recommends that the ideal response would be to implement a prudent fiscal policy, along with structural reforms that would put a check on consumption demand, ease inflationary pressures and eventually allow the RBI to re-focus on growth. The report explicitly says that government spending is budgeting to rise 16.4% this year, and with the Food Security Bill also being prepared, the Indian economy simply cannot afford this at the moment.


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