RBI keeps repo, CRR, and other key rates unchanged

While keeping key rates unchanged, the RBI said further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures


The Reserve Bank of India (RBI), in its mid-term credit policy review has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged. The central bank said reduction in policy rate at this juncture could exacerbate inflationary pressures.

"The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives. Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," the central bank said in a statement.

With no change in key policy rates, the repo rate (the rate at which the RBI lends money to banks) remains at 8%. Similarly reverse repo rate (the rate at which the RBI borrows from banks), CRR, and bank rate remains at 7%, 4.75% and 9%, respectively.

Repo Rate.......................8.0%
Reverse Repo Rate
Bank Rate


According to the RBI, since its Annual Policy statement in April, global macroeconomic and financial conditions have deteriorated while the domestic macroeconomic situation too raises several deepening concerns. "While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend," it said.

Economic activity in 2011-12 moderated sequentially over the quarters to take growth to a low of 5.3% in fourth quarter, though for the year as a whole it was 6.5%. Deceleration in industrial production from the supply side and weak investment from the demand side have in particular, contributed to the growth slowdown. The index of industrial production (IIP) increased by just 0.1% in April 2012. Even as the manufacturing Purchasing Managers' Index (PMI) for May suggested that industrial activity remains in an expansionary mode, there is no question that the pace of expansion has slowed significantly.


Rejecting the theory that interest rates are affecting growth, the RBI said, "Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen  during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown."


The recent depreciation in rupee may act as demand stimulus overtime, the RBI said adding that one implication of the rupee depreciation over the past several months is that domestic producers have gained in competitiveness over foreign producers. "Over time, this should result in expanding exports and contracting imports, thus acting as a demand stimulus," the RBI said.


The RBI said, the euro area sovereign debt problem has continued to weigh on the global recovery. After a brief phase of relative calm reflecting the large liquidity injection by the European Central Bank (ECB), renewed concerns have arisen about a sustainable solution to the sovereign debt problem and the increasing vulnerability of the banking sector.


"While slowing global growth has dampened commodity prices, heightened risk aversion and the resultant slowing of capital flows will have a significant adverse impact on emerging and developing economies (EDEs), including India. Also, should there be an event shock, central banks in advanced economies will likely do another round of quantitative easing. This will have an adverse impact on growth and inflation in  EDEs, particularly on oil importing countries such as India, through a possible rebound in commodity prices," the central bank said.


Power generation in a mess?

The delay by corporates in signing the fuel sharing agreements, which basically favour Coal India, is seen as a main reason for the shortage of coal-based power. Will the establishment of a coal regulator help in sorting issues?
Recently Coal India announced its annual results. For the year ending 31st March 2012, the balance sheet shows very healthy Revaluation Reserves of Rs26,997.84 crore against a paid up capital of Rs6,316.36 crore. Against the actual demand of 696 million tonnes (MT) of coal, during 2011-12, Coal India was able to meet about 80% (426 MT), with other sources supplying some 98 MT leaving a shortage of 161.50 MT.

 Power minister Sushil Kumar Shinde has projected 11,000 MW of new coal-powered electricity generation, to be commissioned by 2012-13, actual but the supply position of coal is far from satisfactory.  Based on current supply position, CIL itself feels that supplies may fall short by 45 MT in the next three years. And mining work is hampered for a variety of reasons.
In order to commence mining operations, the miner has to overcome several hurdles in terms of laid down procedures. At the very outset, an agreement in principle is to be signed with the Government of India, after which, in Stage I, a forestry clearance is to be obtained. This involves the plantation of an equal number of trees displaced (felled?).  Once the mining area is allocated and is formally handed over to the miner for exploitation, it becomes the miner’s responsibility to rehabilitate the households besides complying with fees and other formalities.
At the moment, CIL hopes to get 70 MT of additional coal from its subsidiaries, which have a total of 50 cases pending for approval—31 with various state governments and 19 with the ministry of environment & forests.  Once done, CIL hopes to reach a target of 464 MT in 2012-13 as against 436 MT mined in 2011-12. It is rather unclear at this stage, for how long has these been pending with the above authorities?
In the meantime, the Government of India wants CIL to complete 48 FSAs (Fuel Supply Agreements) with power plants commissioned till December 2011.  Only 17 of them have signed so far.
Why is this delay? It is presumably because FSA is drawn up manifestly in favour of CIL and the GoI does not approve of the terms which show a penalty of 0.01% payable by CIL if they fail to meet 80% of the coal supply committed, and that too applicable after three years!  Besides, the FSA’s force maejure condition protects CIL against equipment breakdown, failure of (third party) contractors to deploy the machinery, shortage of explosives and even power failures!  Literally, buyer of power is at the mercy, in every way, of CIL.
CIL, as a sequel, is now expected to bring about changes in the FSA in about two weeks or so.
Perhaps, when FSAs become more realistic and practical, other power producers will sign them. After all the power producers would want to be compensated for non-delivery of coal committed at actual replacement cost? In the end, the ultimate consumer should not suffer. It would automatically follow that the 17 FSAs signed earlier will also have to be amended in line with the revised contract. Why not the government give a clear cut and approved draft, as a directive, to CIL so that such procedural delays are avoided?
In a statement issued by S Narasing Rao, CMD of Coal India, prices of coal from select blocks of its subsidiaries like Eastern and Western coalfields will be increased by 5 to 10% and this is likely to have a domino effect on power tariff in regions where electricity is produced from coal supplied by them. NTPC takes all the coal produced from most of these blocks. Even though
NTPC can (and will) pass on the increased cost to state electricity boards, they in turn, can only revise their tariff after getting approval from the respective regulators.
In another development, the coal ministry, in order to increase coal supplies, has allocated three coal blocks (Kerndari, Chatti-Bariatu I & II) which were de-located earlier. This measure will enable CIL to increase output by 8.5^ to 9%, one-third of which will go to NTPC.  Such a linkage will also enable NTPC to add 14,500 MW capacity in the 12th Five Year Plan (FYP), as per Arup Roy Choudhury, NTPC chairman.

Mr Narasing Rao strongly feels that a coal regulator, as envisaged by the Centre (GoI) would make pricing issues more or less transparent.
CIL has invited expression of interest from companies for carrying out studies to assess methane reserves in coal fields. CBM—coal bed methane—produced in 2011-12 amounted to 0.23mmscmd (million metric standard cubic metres per day) and is projected to reach 4 mmscmd by 2016-17. So far, 33 blocks have been awarded.
Finally, it is obvious that coal continues to be India’s primary source of energy. The GoI had appointed a committee, led by TL Sharkar in 2007 submitted its recommendations, most of which, unfortunately, remain unimplemented. These include establishment of a coal regulator, time-bound mapping exploration of the entire country and a NELP-like approach in the coal sector.
It is now time that the authorities, considering the lower estimated and actual production of oil and gas resources, and increasing cost of importing these, must devote more time and energy in the development of the coal industry in terms of introducing more sophisticated equipment for extraction, faster distribution by dedicated railway lines, eliminating the inordinate delays in clearances of various approvals for the mining industry to work efficiently and successfully.


Kalam refuses to get into Presidential race

Many citizens have expressed the wish which only reflects their love and affection for me and the aspiration of the people, but after considering present political situation, I decided not to contest the Presidential election, Dr Kalam said


New Delhi: In a rebuff to Trinamool Congress chief Mamata Banerjee and the Bhartiya Janata Party (BJP), former President Dr APJ Abdul Kalam on Moday announced that he would not contest the Presidential poll against United Progressive Alliance (UPA) nominee Pranab Mukherjee, reports PTI.

Issuing a formal announcement, he said he had taken the decision after considering "the totality of this matter and the present political situation".

Dr Kalam, who was propped up by Trinamool as a nominee for the Presidential poll to be held on 19th July, said, "though I have never aspired to serve another term or shown interest in contesting the elections", Mamata Banerjee and other political parties "wanted me" to be the candidate.

"Many, many citizens have also expressed the same wish. It only reflects their love and affection for me and the aspiration of the people. I am really overwhelmed by this support," his statement said.

"This being their wish, I respect it. I want to thank them for the trust they have in me," he said, adding, "I have considered the totality of this matter and the present political situation, and decided not to contest the Presidential election 2012."

After Mamata pushed his candidature, breaking ranks with UPA over the issue, BJP also tried hard to persuade him to contest as Opposition's common candidate against Mukherjee.

BJP leader Lal Krishna Advani called him thrice and sent his close aide Sudheendra Kulkarni twice to convince him. However, Dr Kalam made clear to Advani that his "conscience" is not permitting him to contest, sources said.

The former President has been insisting that he could consider entering the fray only if there was surety about his victory. Several opposition leaders talked to Dr Kalam over phone yesterday to know about his plans.

BJP was more in favour of fielding Dr Kalam than former Lok Sabha Speaker PA Sangma, who is AIADMK Chief J Jayalalithaa and BJD head Naveen Patnaik's choice.

Even JD(U), which wants a consensus for Mukherjee, may support Dr Kalam as he shares a good equation with Bihar Chief Minister Nitish Kumar.



nagesh kini

4 years ago

Anna Hazare in disbanding his so-called Team Anna by disassociating his movement from the politically greedy lot did the best thing after Dr. Kalam rightly choosing to opt out of the presidential race.
Goes to prove that there is still some sanity left!

Justin P

4 years ago

People are eagerly waiting for 2014 elections to throw this Congress out.



In Reply to Justin P 4 years ago

it will be hung parl in 2014 and many more afterwards, until someone (anna,ramdev,etc) decide to float a new party and insert clean patriotic brave honest people into the party while themselves staying away from the political chairs (there are plenty of great ppl around but they never get support from india ppl who sell their country (vote) for a Rs 500 note or alcohol or freebies). jai ho !

Nagesh Kini FCA

4 years ago

It is those fearing exposure seek to preempt by just attacking the CAG or the Judiciary for "overreach".
Sharad Pawar is the latest of the neta-mantri to come out with his opposition openly.
Yes, there is an urgent need to revisit the laws and practices which call for an urgent review.The sooner it is brought about the better it is.
The PM's statement needs to be translated into effective action.

We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)