RBI may take a pause by keeping policy rates unchanged

While WPI inflation moderated in November, core inflation as measured by non-food manufactured WPI inflation is still above the RBI's comfort level. This may make the central bank to take a pause after increasing repo, reverse repo and CRR rates 13 times since March 2010

The Reserve Bank of India (RBI) is most likely to keep policy rates unchanged at its meeting on 16th December, say economists. They feel that while wholesale price index (WPI) inflation has moderated in November, core inflation as measured by non-food manufactured WPI inflation, is still above the RBI’s comfort level and this may make the central bank to take a pause and keep repo, reverse repo and CRR rates unchanged.

“Given the balance between inflation and growth, we expect the RBI to hold the policy interest rate steady over the remaining months of the current fiscal. We think cuts in the repo rate could begin in mid-2012. We assign only a small probability to an easing in the repo rate before second quarter of 2012, unless there is a major deterioration in global economic and financial market conditions,” said Barclays Capital in a note.

In October, the RBI, for 13th time since March 2010, increased repo (the rate at which the RBI lends money to banks) and reverse repo (the rate at which the RBI borrows from banks) rates by 25 basis points (bps) each to 8.5% and 7.5%, respectively to control inflation. The series of rate hikes has cumulatively increased interest rates by 525 bps in the last 20 months.

Expressing similar views, Goldman Sachs, in a research report, said, “While we continue to believe that sequentially falling inflation and much weaker growth will prompt the RBI ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (OMOs), which the RBI has been doing, then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012. As such, we assign only a 30% probability to a cash reserve ratio cut on 16th December. We continue to expect the RBI to cut policy rates by an above-consensus 150 bps in 2012.”

WPI inflation moderated to 9.11% year-on-year (y-o-y) in November from 9.73% in October, slightly higher than market expectations due to sharp deceleration in food inflation and stable manufacturing inflation. However, non-food manufactured inflation (which the RBI refers as core inflation) increased in November to 7.9% from 7.6% in October due to an increase in the prices of metals (1.5% month-on-month or m-o-m), chemicals (0.4% m-o-m) and non-metal minerals (0.9% m-o-m).

For the week that ended on 3rd December, food inflation fell to a nearly four-year low at 4.35% reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat. Food inflation, as measured by the WPI, stood at 6.6% in the previous week. It was recorded at 10.78% in the corresponding period last year. This is the lowest rate of food inflation since the week ended 23 February 2008, when it stood at 4.28%.

A big headache for Indian policymakers at the moment is the unrelenting slide in the rupee. With the dollar in great demand and macro-economic fundamentals weak, the pressure is likely to continue on the Indian currency. Continued weakness in the currency is pushing up the cost of imports like edible oil, fuels and metals. For example, while the global crude oil prices rose by nearly 20% in November 2011 compared to a year earlier, the rupee price of oil shot up by around 40% due to currency depreciation.  

Although India is a relatively closed economy, the rupee is a pro-cyclical currency and cyclical challenges are likely to outweigh seasonal positives into first quarter of 2012. Analysts expect the rupee to weaken further due to growth concerns and capital outflows. “We expect little near-term relief for the trade deficit, as exports slow and the reduction in the import bill is limited by oil imports and investors’ huge appetite for gold. As such, we do not expect rupee strength to resume until economic expectations bottom out, spurring portfolio flows back into Indian markets,” said Standard Chartered Research in a note.

Recently, there has been much debate about whether the RBI should cut the cash reserve ratio (CRR). “The still-elevated November inflation rate will offset market pricing of immediate CRR cuts by the RBI, despite the lower lower-than-expected industrial production numbers, as well as tight liquidity conditions. We continue to expect the RBI to inject liquidity via OMOs and not via CRR cuts over the near term—until March 2012 under our base case—as CRR cuts would likely stoke inflation expectations, which are just beginning to fall,” added Barclays Capital.

The liquidity deficit in the banking system of Rs880 billion, well above the RBI’s comfort level of Rs600 billion has increased expectations of a CRR cut from its current level of 6%. According to Standard Chartered, the RBI will be in no hurry to signal a change in stance this week. “Following recent comments from the RBI that the CRR is also considered a monetary policy tool, a cut in the CRR appears unlikely. In terms of supporting banking-system liquidity, we expect the RBI to continue with its OMO. Any rate cuts will thus have to wait until second quarter of 2012 when WPI inflation cools to 6.5% to 7%,” Standard Chartered said in a report.
The government and the RBI have accepted that high interest rates may hurt the country’s growth prospects, but the apex bank has underlined that bringing inflation under control is its major agenda.

The fall in food inflation comes as a silver lining for the government at a time when the economy is experiencing a slowdown, with GDP growth dipping to 6.9% in the second quarter, the lowest rate of expansion in over two years. Industrial production has also witnessed a contraction, with output shrinking by 5.1% in October. Headline inflation, which also factors in manufactured items, has been above the 9% mark since December 2010.

The RBI has hiked interest rates 13 times since March 2010 to tame demand and curb inflation. In its second quarterly review of the monetary policy in October, the central bank had said it expects inflation to remain elevated till December on account of the demand-supply mismatch before moderating to 7% by March next year.


‘Insurance Ombudsman may take six to nine months for grievance handling’

Nagesh Kini, who was auditor of general insurance companies, believes that the Insurance Ombudsman is a great option due to low cost, simple procedures and speedy redressal, even though it may take longer than mandated

Nagesh Kini has been an auditor of general insurance companies and General Insurance Corp. He is now an activist on consumer, finance, civic and environment issues. He believes that the Insurance Ombudsman is a great option due to low cost, simple procedures and speedy redressal, even though it may take longer than mandated. Excerpts:

Moneylife (ML): We have an Ombudsman office that forms a part of the Alternative Dispute redressal (ADR) mechanism for the insurance sector, but what are the pre-requisites before approaching the Ombudsman?

Nagesh Kini (NK): All insurance companies have an in-house redressal mechanism to resolve disputes. This should ideally be the first step to resolve the issues. It is advisable to file an application first to the insurance company’s grievance cell. Though this is not a hard and fast rule. When the Ombudsman is approached directly before approaching the in-house grievance cell of the company, it may ask the policyholder to address the matter first to the redressal cell of the insurer. Other pre-requisite is that the policyholder needs to file a declaration with the Ombudsman stating that he had not filed or would withdraw any application filed before other forum or court.

ML: In what ways the Ombudsman’s office is beneficial to a policy holder? What would encourage one to approach the Ombudsman?

There are several benefits to approach the Ombudsman such as…
a. There is a speedy redressal.
b. It is cost efficient, because there is no need to appoint a lawyer, no court fees etc.
c. It is less adversial because the procedure is very simple. A simple application is to be filled up which is sent to the insurer for its response. On receipt the Ombudsman can call both for a personal hearing before delivering his verdict.

ML: Is the Rs20 Lakh pecuniary jurisdiction of the Ombudsman sufficient in the present time?

Keeping the inflation in mind, the pecuniary jurisdiction of the Ombudsman needs to be enhanced. Mediclaim policies that fall under the ‘personal claims’ may often exceed Rs20 lakh. Medical expenses in the operations like Cardiac and cancer have gone up substantially.

ML: Can a group insurance policy holder approach the Ombudsman’s office?

Yes, though the group insurance is discounted premium as a group of people or employees are covered under the same policy, claims can be filed by an individual.

ML: Well… on paper an Ombudsman has to clear a matter/case within 90 days from the date of filing, does it reflect in practice?

It seldom happens because of operational constraints like manpower, money, budget and stationery. It is not always possible for the Ombudsman to deliver his verdict within 90 days. Generally it takes more time to clear an application. In many cases, it can take six to nine months. Also there may be procedural delay like when either of the parties do not appear at hearing or delayed response from insurers or when relevant documents are not filed.
ML: Ombudsman’s jurisdiction is also limited to claims related to ‘personal lines’ aspect. But where would a policy holder go who has taken fire insurance for his business.
A dividing line needs to be cleared upon this point. This is because take for e.g. a car, which is in the name of the company, but is used for personal purpose by the company official. Where would he go to claim the insurance, the Ombudsman or the Civil Court, assuming that the claim is within the pecuniary jurisdiction of the Ombudsman?

ML: What is the scope for appealing on the Ombudsman’s order?

The Ombudsman’s order is binding on the insurer. The verdict is not binding on the policy holder, who can appeal the order in the Civil or the Consumer Court.

ML: Is the Ombudsman better than Consumer forum or Civil Court?

Yes.  Appealing to the Consumer forum or Civil Court defeats the purpose of the Ombudsman because the Ombudsman was established to save on time and cost. By going back to the Consumer forum and Civil Courts the policy holder will have to repeat all the legal formalities, like appointing lawyers.
ML: How can the appeal aspect of the Ombudsman order be made efficient than what we have discussed above?

I think there should be a separate, higher mechanism at state or at the central level as an appellate body. This would obviate the need of going back to the Consumer forum or the Civil Courts.

ML: Should the pending Insurance cases in the Civil and Consumer Courts be transferred to a ‘New Insurance Judicial’ body in order to streamline the insurance cases?

No. Rather the cases should be transferred to the Ombudsman because setting up a new body in the government is a big hassle. By doing so, the urge to improve the existing ombudsman office would be realized. What is advisable is to make the existing mechanism more efficient than to set up newer bodies.

ML: What would be your overall suggestions to make the present ADR mechanism of the insurance sector more efficient?

Increase the pecuniary jurisdiction of the Ombudsman to at least Rs50 lakh. Improve operational constraints like manpower, office space, infrastructure and computers. On the appeal aspect, the civil and the consumer courts should be replaced by Insurance Appellate Tribunal.


RIL’s D6 block gas output falls to all-time low of 39.8 mmscmd

Reliance started natural gas production from the KG-D6 fields in April 1, 2009, with output of about 40 mmscmd

Reliance Industries has seen gas output from its eastern offshore KG-D6 gas fields drop to a fresh all-time low of 39.80 million standard cubic metres per day.

Natural gas production from the Dhirubhai-1 and 3 gas fields and the MA oilfield in the KG-DWN-98/3, or KG-D6, block in the Krishna-Godavari Basin of the Bay of Bengal stood at 39.80 mmscmd in the week ended December 4, according to a status report filed by the company with the Oil Ministry.

The output comprised 32.94 mmscmd from the D1 and D3 gas fields and 6.86 mmscmd from the MA oilfield. The KG-D6 production is lower than 61.5 mmscmd rate achieved in March 2010, as a drop in pressure in the wells and increased water ingress has led to a lower per-well gas output. The report said of the 18 wells drilled, completed and put on production in the D1 and D3 fields, four wells--A2, B1, B2 and B13--had to be shut or closed due to high water cut/sanding issues.

The output from KG-D6 is short of the 70.39 mmscmd-level (61.88 mmscmd from D1 and D3 and 8.5 mmscmd from the MA field) envisaged by now as per the field development plan approved in 2006.

While Reliance holds 60% interest in KG-D6, UK’s BP Plc holds 30% and Niko Resources of Canada the remaining 10%. Reliance started natural gas production from the KG-D6 fields in April 1, 2009, with output of about 40 mmscmd.

The MA oilfield currently produces about 12,715 barrels of crude oil per day. In addition, 1,831 barrels of condensate are produced from the field every day. The report said 14.89 mmscmd of the gas output is being sold to fertiliser plants and 22.02 mmscmd to power plants.

The remaining 2.89 mmscmd is consumed by other sectors, including those fed by the East-West pipeline that transports gas from the East Coast to consumption centres in the West. Reliance had projected an output of 39.50 mmscmd of gas during December.

As per the status report, out of the 22 wells planned in Phase-I of D1 and D3 field development, 18 wells have been drilled and completed so far. Of these, 14 wells were put on production, while four wells were kept closed due to high water cut and sanding issues.

In the late afternoon, Reliance was trading at around Rs746 per share on the Bombay Stock Exchange, 0.58% up from the previous close.


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