RBI asks government to free diesel prices

“As the food subsidy bill is expected to rise, it will be prudent to fully deregulate diesel prices to contain both aggregate demand and the trade deficit,” the RBI said in its third quarterly monetary policy review

Mumbai: The Reserve Bank of India (RBI) today said the government should deregulate diesel prices in order to contain the trade deficit, which is expected to widen to $160 billion during the current fiscal, reports PTI.

“Particularly, as the food subsidy bill is expected to rise, it will be prudent to fully deregulate diesel prices to contain both aggregate demand and the trade deficit,” the RBI said in its third quarterly monetary policy review.

While petrol prices are market-linked, the government decides the rates of LPG, kerosene and diesel, which usually results in a large budgetary expenditure on subsidies.

The central bank further said the current levels of domestic prices of petroleum products do not reflect international prices.

“Petroleum product prices have also not been revised in response to crude oil prices, contributing to both fiscal slippages and suppressed inflation. Revision in domestic administered prices will add to inflationary pressures, although such revisions are necessary to maintain the balance between supply and demand,” the RBI said.

According to the financial stability report (or FSR) of the RBI released earlier, the December trade deficit gap for the year would broaden from $155 billion to $160 billion, a significant rise from $104.4 billion in the previous year.

It is estimated that the higher expenditure on petroleum subsidy could drive up the fiscal deficit by around 0.8 percentage points of the gross domestic product (GDP) for 2011-12.

The government had fixed the fiscal deficit target for the current fiscal at 4.6%.

“If the increase in government borrowing already announced is an indication, the gross fiscal deficit for 2011-12 will overshoot the budget estimate substantially,” it said, adding that the increase in fiscal deficit could potentially crowd out credit to the private sector.

“Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation,” it said.

The RBI has injected Rs32,000 crore into the system by lowering the Cash Reserve Ratio (CRR) by half-a-percentage point today, but kept the short-term lending rate unchanged in view of persisting inflationary concern.

It has also revised the GDP growth projection for 2011-12 downward to 7%.

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No change in EMIs; banks to have more funds

Dena Bank executive director AK Dutt said, “Softening of CRR would lead to five basis point reduction in cost of deposits. However, it would not have any impact on the interest rates”

Mumbai: There is no immediate respite to home, auto and corporate loan borrowers in terms of their monthly equated instalments (EMIs) but with the Reserve Bank of India (RBI) reducing the cash reserve ratio (CRR), banks will have more money to lend, reports PTI.

After the Reserve Bank unveiled the third quarterly review of the monetary policy, several bankers said that they may not go in for rate cut immediately.

However, a few like Oriental Bank of Commerce executive director SC Sinha said the CRR cut would “definitely lead to reduction in interest rates.”

Chairman of the Prime Minister’s Economic Advisory Council and former RBI governor C Rangarajan said that as the primary injection of Rs32,000 crore liquidity (through CRR cut to 5.5% from 6%) would have a multiplier effect, the interest rates would soften.

“The improvement in liquidity condition will automatically have effect on the interest rates. It would lead to softening of interest rates,” he said.

CRR is the percentage of bank deposit that lenders have to keep with the RBI. The new rate would be effective from 28th January.

Since March 2010, the retail and corporate loans have become expensive for the borrowers but the fixed deposit holders had benefited from the 375 basis point hike in the short-term lending rate by the RBI.

Canara Bank executive director AK Gupta said banks would now get much-needed liquidity. This will also allay fears of further hike in base rate.

“Probably, interest rates may not come down immediately,” he said, adding, the banks will, however will have more cash at their disposal.

Concerned over upside risk on inflation, the RBI, however, kept policy rate unchanged.

The RBI opted to keep the repo rate, at which it lends to the banks, unchanged at 8.5%, compelled by the worsening global economic outlook and decelerating domestic growth.

Reverse repo (rate at which the RBI borrows from banks) is also kept at 7.5%.

RBI itself said that “CRR is the most effective instrument ... the reduction can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them.”

Bank of India executive director N Seshadri said, “I don’t think with the CRR, there would be a reduction in base rate and definitely rate cut would happen when repo rate is reduced.”

Expressing similar view, Dena Bank executive director AK Dutt said, “Softening of CRR would lead to five basis point reduction in cost of deposits. However, it would not have any impact on the interest rates.”

RBI governor D Subbarao said in a statement, “In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance.”

“Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate.

“However, the persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks.

In this context, the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time,” Mr Subbarao said.

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Edelweiss’ Q3 Profit after Tax at Rs29 crore

Edelweiss Financial Services Limited had quarterly revenues of Rs455 crore and quarterly profit after tax of Rs29 crore for the quarter ended 31 December 2011.

Edelweiss Financial Services Limited had quarterly revenues of Rs455 crore for the quarter ended 31 December 2011, compared with Rs372 crore for Q2 FY12. It had quarterly profit after tax of Rs29 crore for the quarter ended 31 December 2011, compared with Rs26 crore for Q2 FY12.

Edelweiss has achieved significant topline growth in the third quarter which reflects the business diversification that it has been striving for. The bottomline growth continues to be challenged due to a combination of external and internal factors. These factors include tough environment leading to marked slowdown in activity levels, continuing investments in incubating new businesses – life insurance and retail businesses, and depreciation on new office property. Collective impact of these at profit after tax level is about Rs12 crore in the third quarter.

According to Rashesh Shah, chairman and CEO, Edelweiss Financial Services Limited, “Third quarter of this year has been a tough quarter where activity levels got impacted due to volatility in markets, high inflation and interest rates and slowdown in industrial output. Rupee depreciation and overall weak global sentiments on the back of continuing Eurozone financial crisis added to the challenging operating conditions.”

“Our performance this quarter demonstrated resilience of our diversified business model as we achieved significant topline growth and a reasonable bottomline growth QoQ (quarter-on-quarter) even in these tough market conditions,” Mr Shah added.

In the late afternoon, Edelweiss was trading at around Rs31.35 per share on the Bombay Stock Exchange, 3.47% up from the previous close.

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