EGoM on fuel price hike may happen next month

The oil ministry has suggested that the government cut customs duty on crude oil to zero from the current 5% and on diesel from 7.5% to 2.5%. It is also looking at a small reduction in excise duty

New Delhi: The much anticipated meeting of a panel of ministers on raising auto and cooking fuel prices may happen next month, reports PTI quoting a top oil ministry official.

The Empowered Group of Ministers (EGoM) headed by finance minister Pranab Mukherjee is being convened soon to discuss a combination of a price hike and a reduction in government duties.

“While we have been pushing for an early EGoM meeting for long, even the finance ministry is now keen on a meeting soon," he said.

The oil ministry is pushing for the burden arising from the rise in crude oil prices to be equitably shared between consumers, the government and state-owned companies, he said.

State-owned oil firms currently lose Rs15.44 per litre on the sale of diesel. One-third of this will have to be passed on to consumers in stages, while a similar amount will have to be borne by the government by way of either providing cash subsidy or reducing customs and excise duty. The remaining would be absorbed by upstream firms like ONGC and the fuel retailers.

A similar formula would apply to the Rs27.47 per litre loss on kerosene and Rs381.14 under-realisation on the sale of every 14.2-kg domestic LPG cylinder.

The government, the ministry feels, should cut customs duty on crude oil to zero from the current 5% and on diesel from 7.5% to 2.5%. Also, there should be a small reduction in excise duty.

With inflation at an uncomfortable 9%, a hike in the retail price of diesel should be kept to the bare minimum, the official said.

Without these measures, Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) are together projected to lose Rs166,712 crore in revenues on selling diesel, domestic LPG and kerosene rates at government-controlled rates, which are way below the market price.

Oil firms also appear to have applied the brakes on a hike in petrol price after inflation in May topped 9.06%. Oil firms, which last month hiked petrol price by a steep Rs5 per litre, are losing Rs1.98 a litre on a commodity which was freed from government control last June.

Oil minister S Jaipal Reddy has held meetings with prime minister Manmohan Singh and Mr Mukherjee on early convening of a meeting of the EGoM, which is the decision-making body on fuel price revisions.

The EGoM has not met since June last year even though crude oil prices have spiralled upward by over 50%.

The basket of crude that India buys was worth around $70-$72 per barrel in June last year, but the same averages $111.54 a barrel in June this year.

The official said IOC, BPCL and HPCL currently lose about Rs490 crore per day on fuel sales.

The three state-owned oil marketing companies are virtually living off borrowed money as current realisation on fuel sales is not sufficient to meet the cost of importing raw material (crude oil).

The oil ministry has been pushing for an increase in diesel, domestic LPG and kerosene rates and wants the government to muster the political will to take the hard decision.

The EGoM was originally scheduled to meet on 11th May, but was postponed at the last moment. There was talk of an EGoM—which comprises representatives of all major allies in the ruling UPA—meeting on 9th June, but the meet was never scheduled for that day.

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Cap on bank exposure in liquid MFs will curb volatility: Crisil

RBI directive to banks to cap their investments in liquid MF schemes will help reduce volatility in the debt fund flows

The recent Reserve Bank of India (RBI) directive to banks to cap their investments in liquid mutual fund schemes at 10% is positive for the asset management industry, as it can help fund mangers make better decisions, feels leading rating agency Crisil.

The directive would reduce volatility in the market as it will help fund managers make more prudent investment decisions since they are sure of the investible corpus, Crisil director, capital markets, Tarun Bhatia said.

"Crisil Fund Services believes that this (RBI directive to banks to cap their investments in liquid MF schemes) will help reduce volatility in the debt fund flows," Bhatia said.

Banks normally park their surplus funds in liquid MF schemes and redeem them when credit offtake is good or to meet their advance tax outflows.

In the 3rd May annual monetary policy, RBI had said, "investment in liquid schemes of debt-oriented mutual funds (DoMFs) by banks will be subject to a prudential cap of 10% of their networth as on 31st March of the previous year".

The directive was issued as RBI fears that the circular movement of the same fund between banks and MoMFs can potentially lead to systemic risks.

The RBI also said liquid schemes continue to rely heavily on institutional investors such as commercial banks for investment. In turn, DoMFs invest heavily in certificates of deposit of banks.

"Such circular flow of funds between banks and the DoMFs could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk. It is, therefore, felt prudent to place certain limits on banks' investments in MFs," RBI had said.

As of May 2011, total assets under management (AUM) stood at Rs7.31 lakh crore, out of which the liquid schemes stood at Rs1.83 lakh crore, as per the Association of Mutual Funds in India data.

Crisil envisages a significant reduction in the AUMs with banks withdrawing the surplus amount from these schemes in a phased manner.

According to Bhatia, as per the new RBI guidelines, banks' exposure to the MF industry should come down to around Rs30,000 crore from the current Rs1.3 lakh crore, by this October. As of May, the banks' exposure in DoMFs stood Rs1.3 lakh crore.

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LIC Nomura Mutual Fund launches Fixed Maturity Plan Series 46

LIC Nomura Mutual Fund new issue closes on 28th June

LIC Nomura Mutual Fund has launched LIC Nomura MF Fixed Maturity Plan Series 46, a close-ended income scheme.

The investment objective of the scheme is to minimise interest rate risk by investing in a portfolio of fixed income securities which mature on or before the date of the maturity of the scheme.

The new issue closes on 28th June. The minimum investment amount is Rs10,000.

CRISIL Liquid Fund Index is the benchmark index. YD Prasanna is the fund manager.

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