Core sector growth at 7-month high of 5.1% in Sept

Low base, rapid expansion in coal, cement and refinery products boost production of infra industries

Indicating a turnaround in industrial growth, the eight core sectors grew by a seven-month high of 5.1 per cent in September — more than double the 2.3 per cent in August — backed by a low-base advantage and rapid expansion in coal, cement and refinery products, official data showed on Wednesday.

Before this, it was only in February 2012 that these industries had grown at a higher pace, of 6.9 per cent. In September last year, the eight core industries expanded by 2.5 per cent.

These eight sectors expanded by 3.5 per cent in the first six months this year, against five per cent in the corresponding period last year. Crude oil and natural gas production contracted in September. Coal output expanded 21.4 per cent in September, against a contraction of 18.2 per cent in September 2011.

A low base effect and higher dispatches due to fuel supply pacts by Coal India with power companies are given as reasons by analysts for this growth. Coal output grew 11 per cent in August.

Cement output grew 13.4 per cent due to a pick-up in construction activity in September, after showing a 0.1 per cent contraction in August.

“Cement is a seasonal component; the production goes down during the monsoon as construction activity slows,” said an analyst.

Crude oil and natural gas continued to remain in the contractionary zone. Crude oil showed negative growth for a fourth month at 1.7 per cent versus 0.6 per cent in August.

Refinery products grew a robust 11.4 per cent in September, up from 8.4 per cent in August. Natural gas output fell 14.8 per cent in September, compared to 13.8 per cent contraction in August.

Electricity generation growth has slowed in the past three months. It grew just 3.7 per cent in September, albeit up from 1.9 per cent in August. After contracting for five consecutive months, fertiliser showed a positive growth of 5.7 per cent in September.

The eight core industries have a 38 per cent weight in the Index of Industrial Production (IIP), which may show an uptick from September onwards as the low base effect comes in. The IIP grew 2.7 per cent in August, a slight recovery, given the low numbers in the previous months of this financial year.

India economy grew 5.5 per cent in the first quarter of the current year, slightly up from 5.3 per cent in the fourth quarter of 2011-12.

The second quarter of the economy is also expected to be lacklustre.

Kejriwal now attacks RIL, says it made undue gains

Company denies allegations, says IAC lacks understanding of technicalities

Reliance Industries (RIL), the country’s largest listed company, and its chairman Mukesh Ambani came under attack from India Against Corruption (IAC) activists Arvind Kejriwal and Prashant Bhushan on Wednesday for allegedly “threatening the democratic structure of the country” by influencing the appointment of ministers at will.

Even the prime minister was powerless in front of the explorer’s might, the activists said at a crowded press conference at the Constitution Club here. Kejriwal, who started proceedings in Hindi, alleged that Jaipal Reddy, Union minister for petroleum and natural gas till last week, was removed because he opposed an RIL proposal to raise the price of gas by over three times to $14.2 per mBtu (million British thermal units).

People should prevent the government from granting a $14.2 per unit price to RIL by sending RTI applications to the new minister, M Veerappa Moily, the activist said.

“RIL has the contract to extract oil from the KG (Krishna-Godavari) basin. Under an agreement of 2009 with the government, they are supposed to sell gas at $4.2 per mBtu up to March 31, 2014. Midway now, RIL is demanding the price be increased to $14.2 per mBtu. Jaipal Reddy resisted that and he was thrown out,” Kejriwal said. He added Reddy was not the first to lose his job for taking on Reliance, citing the instance of Murli Deora having replaced Mani Shankar Aiyar in 2006. Aiyar, according to the activists, had resisted an RIL move to increase capital expenditure in the basin, which they said, reduced the government’s profits and enriched the company’s coffers.

Bhushan called for cancellation of all contracts awarded to RIL. “Consequences, otherwise, are horrendous. These crony capitalists are a threat to our democracy,” he said.

According to the IAC, if the rise in gas prices was allowed, it would result in a substantial increase in the cost of power for end-consumers. “Today, power from gas-based power plants costs around Rs 3 per Kwh (kilowatt hour). If the gas price is increased as demanded by Reliance, power prices would go up to Rs 7 per Kwh,” the activists said in a statement. Such escalation in prices could make most of those gas-based plants unviable and they would have to be shut, the statement added.

Another key allegation was “goldplating” of capital expenditure, of which the Comptroller and Auditor General had said there was strong evidence. The initial development plan submitted by RIL in 2004 said it would produce 40 mscmd for an investment of $2.39 billion. In two years, RIL submitted another plan, saying it would produce double the gas for an investment of $8.8 billion. “Doesn’t that sound strange? To double production, you increase your investment by four times? Having put the initial infrastructure in place, it should have cost less to create additional production capacity,’’ Kejriwal said.

The activists said the BJP had to take part of the blame as the original contract, which benefited the company, was signed in 2000 under the BJP-led NDA government.

The press conference had some uninvited guests, too, who tried to disrupt proceedings. Kejriwal dismissed it, saying, “This is the least you can expect when you take on the corrupt and powerful.”

RIL’s response

The statements made by IAC in the press conference today are devoid of any truth or substance whatsoever and are denied.

The deepwater exploration project in the KG-D6 basin has deployed the best technical resources and has been recognised by the oil and gas industry as one of the very best in its class. This project has added great economic value to the country and by all accounts is a project of which India can be justly proud.

Irresponsible allegations made by IAC at the behest of vested interests, without basic understanding of the complexities of a project of this nature, do not merit a response.

WHAT THE IAC SAYS

In 2006, Mani Shankar Aiyar was removed and Murli Deora brought in to increase RIL capex from $2.39 billion to $8.8 billion and to increase gas price from $2.34 per mBtu to $4.2 per mBtu

In 2012, Jaipal Reddy was removed as oil minister and M Veerappa Moily brought in to increase gas prices from $4.2 per mBtu to $14.2 mBtu and to condone RIL’s blackmailing by reducing gas production

Huge benefits given to RIL in the last decade, despite flagrant violations of various agreements by RIL. Benefits to RIL causing serious price rise in the country

Both BJP and Congress involved. BJP signed a sweetheart deal with RIL in 2000. Congress faithfully implemented it

If RIL’s demand of increasing the gas price to $14.2 is accepted, it would lead to the shutting of several gas-based power plants and increase in power and fertiliser prices. It would result in Rs 43,000 crore of additional benefits to RIL

RBI holds key rates, but indicates cuts in January

The RBI chose not to oblige the government or the market expectations of a cut in key policy rates. Trims CRR by 25 bps to release Rs 17,000 cr; banks may not drop interest rates.....

The RBI chose not to oblige the government or the market expectations of a cut in key policy rates.

Post the reform measures unveiled over the past month and the five-year fiscal consolidation plan released on Monday, the expectation in the Government was the Reserve Bank of India would cut key rates. But the RBI only cut the cash reserve ratio (CRR) by 25 basis points to 4.25 per cent from 4.50 per cent. This measure is expected to release Rs 17,500 crore into the system.

Still worried about inflation, the RBI maintained status quo on repo rate, leaving it unchanged at 8 per cent — the same level it has been at for the past six months.

Will the CRR cut lead to interest rate cuts by banks? Not immediately. That’s the sense one got from top bankers such as Pratip Chaudhuri, Chairman, State Bank of India; Chanda Kochhar, Managing Director, ICICI Bank; and Aditya Puri, MD, HDFC Bank, who addressed the media immediately after their interaction with RBI Governor D. Subbarao.

They were ‘unpleasantly surprised’ by the higher provisioning requirement (2.75 per cent on standard restructured loans) and that took away the positive effect of the CRR cut. SBI, for instance, is expected to gain about Rs 225 crore through the CRR cut but will have to set apart Rs 300 crore on higher provisioning requirements.

Although Chaudhuri kept his options open, others were clearly less enthusiastic about cutting rates. Retail customers looking for another round of cuts in home loan or car loan rates may have to wait a few more months. The markets reacted to the RBI policy with disappointment. While the broader market sentiment was weak, reflected by the 1.1 per cent drop in the BSE Sensex, the BSE Bankex dropped 2.35 per cent (310 points).

The rupee was, however, marginally up and closed a shade higher at 53.97 to the dollar after a weak beginning.

The 10-year government bond traded at 8.18 per cent, down 5 basis points. The RBI Governor said, in an interview to Business Line, that he did not cut the repo rate “because a cut at this time may dilute the RBI’s anti-inflationary stance”.

Balancing the current growth and inflation situation needed a calibrated approach which would support growth, easing of supply constraints but at the same time helping ease inflation, he said.

The RBI said in its guidance, “The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth. It anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter. While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic.”

The RBI has pared its GDP growth forecasts through successive quarterly reviews The latest GDP forecast for this fiscal is 5.7 per cent growth for the fiscal while WPI inflation is projected to be 7.5 per cent for March 2013.

RBI cuts CRR by 25 bps, leaves rates unchanged

Taking a cautious stance, the Reserve Bank today cut CRR by 0.25% - the percentage of deposits banks keep with central bank - but refrained from reducing lending rates.

The RBI decision, which comes days after a slew of measures taken by the government to push growth, will release Rs 17,000 crore of primary liquidity into the system.

The liquidity infusion, RBI said, would ensure adequate flow of credit to productive sectors of the economy.

Following the cut, CRR will come down to 4.5% while the repo rate, at which the central bank lends to the banks, would remain unchanged at 8%.

The reverse repo, at which it absorbs excess liquidity through borrowings from banks, remains at 7%.

RBI cuts FY13 GDP growth forecast to 5.8% and raised FY13 inflation projection to 7.5%.

RBI said the CRR cut will be effective from November 3. The moderation in CRR rate is likely to goad banks to bring down their lending rates, which will improve investments and help growth.

Speaking on the occasion, RBI Governor D Subbarao said that the CRR cut was necessary to pre-empt a prospective liquidity strain

Weekly Stock Outlook

Bank Stocks Outlook:

Shares of most banks are seen slightly weak over the next few trading sessions with the market eyeing the Reserve Bank of India's second quarter monetary policy review on Tuesday for cues.

FMCG Stocks Outlook: 

In thin band next week on defensive play Shares of fast-moving consumer goods companies are seen in a narrow range next week as investors may hold on to their positions in this defensive sector amid weakness in the market. 

Oil Stocks Outlook: 

State-owned oil cos seen muted next week Shares of state-owned oil marketing companies may remain subdued next week as investors will wait for the Reserve Bank of India's policy review Tuesday, and for companies' Jul-Sep earnings.

Capital Goods Stocks Outlook:

RBI policy to give cues next week Next week, shares of most capital goods and engineering companies are likely to take cues from companies' Jul-Sep earnings and the Reserve Bank of India's policy review on Tuesday, analysts said.

Telecom Stocks Outlook: 

Trend bearish next wk; Idea seen positive Telecom stocks are expected to show a bearish trend next week as the uncertain regulatory environment and expected high outgo on account of one-time spectrum fee, spectrum refarming and high 2G auction bid price are likely to keep investors at bay.

IT Stocks Outlook: 

Seen trading in narrow range next week Shares of major information technology companies are likely to trade in a narrow range next week, but HCL Technologies and Tata Consultancy Services may fare better than the other top tier companies, analysts said.

Pharma Stocks Outlook: 

Mixed bag; sector awaits drug pricing policy The coming week is likely to be a mixed bag for pharmaceutical stocks, with stock-specific action likely, analysts said. The drug pricing policy, expected on Nov 24, will be the only "hangover" for pharma stocks in the coming week, said Siddhant Dhandekar, fundamental analyst at ICICI Direct.

Cement Stocks Outlook: 

Rangebound next wk; Oct despatch data eyed Shares of major cement companies are likely to trade rangebound for most part of next week, but may see some stock-specific movement after companies announce their monthly despatch data on Thursday, analysts said.

Auto Stocks Outlook: 

Sideways to positive next wk; RBI policy eyed Shares of frontline automobile companies are likely to trade sideways-to-positive next week, with all eyes on the Reserve Bank of India's

monetary policy review and October auto sales numbers.

Steel Stocks Outlook: 

Down; fundamentals continue to remain dull Shares of major steel companies may continue to decline next week on the back of weak fundamentals and expectations of disappointing Jul-Sep earnings, analysts said. 

UB Group Tells DGCA it will Infuse Funds into KFA

Employees return to work but the airline is far from taking off as it first needs to convince the regulator to lift its suspension 

The financially-stretched UB Group will infuse funds into Kingfisher Airlines,the Directorate General of Civil Aviation (DGCA) was told by the airline management on Friday.After a 25-day standoff,Kingfisher employees have begun reporting to duty.However,Kingfisher Airlines revival is not dependent on paying its employees four months salaries,(nearly.80 crore),by December,but also on the carrier having a clear plan of action to clear dues to airport operators,oil companies and other stakeholders.The aviation regulator DGCA is understood to have directed the cash-strapped carrier in a meeting with the airline CEO Sanjay Aggarwal.

The aviation regulator will look at financial viability of the airline and the carrier will need to pay oil companies,Airports Authority of India (AAI) and the maintenance and repair companies.Aggarwal is expected to submit a revival plan soon, sources in the DGCA said.On Thursday,the Kingfisher management convinced its employees to join back work from October 26,with the promise of paying four months salary in a staggered manner before December.A months salary was disbursed on Thursday itself.

The employees,after enduring a seven-month backlog in salaries,seem to believe that the management is serious this time to revive the airline.They could have told us to go to court and claim our salaries.The fact that they are putting in the effort of bringing in crores of rupees means that they intend to restart operations.We have been told that the money would come from the UB Group and according to my knowledge,the revival plan would be submitted next week, a senior pilot said.

Once the revival plan has been submitted,DGCA chief Arun Mishra will consult AAI and oil companies on how things have to be taken forward with the airline,which will also need to participate in the meetings,sources added.If all goes by plan,Kingfisher might fly from the third or fourth week of November.Meanwhile,the airport slots that Kingfisher had asked the DGCA for the current winter schedule remain with the regulator and have not yet been distributed among other carriers.In the meeting with the airline CEO Aggarwal,the DGCA made it clear that Kingfisher must also get in touch with DGCAs regional offices to get its operational preparedness certified.At the moment,the airlines flying permit stands suspended as it could not provide a satisfactory response to DGCAs showcause notice that had asked the airline to explain abrupt cancellations and nonadherence to schedule.Rejoining of employees is only one of the requisites for the airline to revive operations.The most important task for it is to convince the DGCA of its financial position and get them to withdraw the suspension order by meeting the above conditions.

RBI might cut CRR, hold policy rate, shows poll

High inflation continues to be an obstacle in lowering policy rates as of now

The Reserve Bank of India (RBI) is largely expected to announce liquidity easing measures in the second quarter review of monetary and credit policy on Tuesday, a poll of 21 market participants conducted by Business Standard shows. High inflation continues to be an obstacle in lowering policy rates as of now.

About 70 per cent of the respondents were concerned about the rising liquidity deficit and expected RBI to react with a 25 basis points (bps) cut in cash reserve ratio (CRR). With bank borrowings from RBI’s Liquidity Adjustment Facility (LAF) window back to above Rs 1 lakh crore levels, some respondents also felt the central bank could resort to a higher cut of 50 bps in CRR.

Indranil Sen Gupta, India Economist at Bank of America Merrill Lynch, said 50 bps cut in CRR would pull down lending rates 25 bps. Most respondents also expect RBI to inject liquidity through bond purchases under open market operations.

At present, CRR is 4.5 per cent. RBI had reduced it by 25 bps in the mid-quarter monetary policy review held in September, citing concerns over liquidity at the onset of the festive season.

“In light of the seasonal pick-up in credit demand, the cental bank may consider a further reduction in the cash reserve ratio by 25-50 bps to support economic activity,” said analysts at Icra Ratings.

Sticky headline and core inflation might not allow RBI to alter policy rates, they added. At present, the policy rate or the repo rate is at eight per cent. An economist from a large private bank felt only political pressure might lead to RBI easing policy rates at this juncture. “If we go by economic facts, the case for a policy rate cut looks difficult,” the official said. RBI has kept policy rate unchanged since April, citing upward risks to inflation.

Leif Eskesen, chief economist for India and Asean at Hongkong and Shanghai Banking Corporation, noted inflation risks were still to the upside and cutting the policy rate under these circumstances runs the risk of unhinging inflation expectations. “Moreover, the central bank could in this case also be perceived as turning softer on inflation or caving in to political pressures to cut, therefore not being driven solely by what it thinks is the right thing to do,” said Eskesen.

Economists at Nomura were of the view that there was a possibility of RBI cutting CRR by 25 bps as a positive response to the government initiating reform process.

Ministry exempts RIL from CAG's performance audit

Clears KG-D6 investment plan RIL also allowed to declare commerciality of certain wells in NEC 25, KG-D6

The face-off between the government and Reliance Industries Ltd (RIL) is nearing an end, with the petroleum ministry agreeing to exempt the country’s largest private sector petroleum company from a performance audit. Simultaneously, the pending approvals for RIL’s KG-D6 block have also been granted.

In a letter sent to RIL yesterday, the ministry has said an audit under section 1.9 of accounting procedure in the production sharing contract (PSC) would be conducted. The company was informed that government nominees on the management committee (which acts as an oversight body) have also approved all the development proposals made by RIL. “The proposed audit would be under Section 1.9 of the Accounting Procedure of the Production Sharing Contract, and not a performance audit of the operator (RIL),” the ministry wrote in the letter.

The ministry has also told the Principal Director of Audit (Economic & Service Ministries) that “subject to certain conditions, RIL has agreed for a CAG audit under Sector 1.9” and will “cooperate with such an audit without prejudice to any of their rights and contentions”. The CAG has called a kick-off meeting, called the entry conference, with RIL on October 31.

The ministry had withheld approvals to RIL’s investment plans, saying the company must first agree to the CAG doing a second round of audit of the KG-D6 field for 2008-09 to 2011-12. In a meeting on July 13 with petroleum minister Jaipal Reddy, RIL executive director P M S Prasad and BP country head Sashi Mukundan were asked to make all the records and accounts of the KG-D6 block available to the Comptroller and Auditor General as provided for in the production sharing contract. The two partners had sought speedy clearances in four of the blocks (NEC 25, KG-D6 and two in the Cauvery basin) being operated by them.

The company has now been allowed the declaration of commerciality of certain wells in NEC 25 and KG-D6.

After the ministry action, RIL can now implement remedial measures at KG-D6, where output has dipped by more than 55 per cent in the past two years to about 26 million standard cubic metres per day. A senior RIL executive had, however, told Business Standard that though the company was awaiting government approval for arresting the declining production from the KG-D6 block, its partners BP and Niko might not be agreeable to putting in fresh investment if the gas price was not revised.

In its last report, the CAG had raised objections to the operator not drilling the required number of wells. RIL, which allowed the CAG access to all information for 2006-07 and 2007-08 after protesting, is reluctant about giving information for subsequent years. It had maintained that nothing in the PSC permitted an audit of operational, commercial and technical decisions of the operator. In its report submitted last year, the CAG had maintained its scrutiny was consistent with the PSC and was not “merely limited to an arithmetical totalling of charges”.

European countries slashed deficits in 2011, data show

Debt rose as governments pushed ahead with austerity measures to tackle crisis

European countries sharply reduced their deficits last year, official data showed Monday, even as their overall debt grew as governments pushed ahead with austerity measures in the face of the euro crisis.

The deficit of the 17 Euro zone governments fell to 4.1 per cent of gross domestic product in 2011 from 6.2 per cent in 2010, Eurostat, the EU statistical agency, reported from Luxembourg. The Euro zone’s debt as a percentage of GDP rose to 87.3 per cent at the end of 2011 from 85.4 per cent a year earlier.

For all 27 European Union nations, the deficit shrank to 4.4 per cent in 2011 from 6.5 per cent a year earlier, even as debt grew to 82.5 per cent of GDP from 80 per cent.

The most dramatic decline occurred in Ireland, where the deficit shrank to 13.4 per cent of GDP, from 30.9 per cent in 2010. That reflected the sharp expansion of the deficit in 2010, owing to the cost of bailing out the Irish financial sector.

Germany’s deficit slid to 0.8 per cent of GDP from 4.1 per cent, as Chancellor Angela Merkel’s government benefited from the strongest growth of any major Euro zone economy.

Greece, the ailing country where the crisis was touched off three years ago, saw its deficit decline to 9.4 per cent of GDP from 10.7 per cent in 2010.

With the European and world economies flagging, Greece and other embattled nations face an uphill struggle in reducing their deficits to 3 per cent or less of GDP as stipulated under Euro zone rules.

In all, Eurostat said, 17 EU nations had deficits above 3 per cent. Among them were Britain, not a euro member, at 7.8 per cent of GDP, France, at 5.2 per cent, and Italy, at 3.9 per cent.

In comparison, the United States had a debt-to-GDP ratio last year of more than 100 per cent, and a budget deficit of about 8.6 per cent of GDP.

The debt burden of European countries grew partly because recession shrinks the denominator of the debt-GDP equation. That has led some economists argue that Europe would be better off focusing on growth.

But Jörg Krämer, chief economist at Commerzbank in Frankfurt, said, “The main reason why debt-to-GDP ratios in these countries continue to increase is that their deficits are still too high. The deficit is nothing more than the change in the level of your debt.”

In the case of Greece, he noted that even after accounting for the fact that the economy shrank sharply in 2011, the deficit came down only to 9.4 per cent of GDP. “That means you still have a deficit that is far in excess of the 3 per cent or so that is considered sustainable,” he said.

Krämer said there was little prospect of Greece outgrowing its problems.

“If you want to make its debt burden sustainable,” he said, “there will have to be some kind of debt forgiveness and restructuring.”

But deficit cutting, combined with structural reform, is still the only solution for the Euro zone, he added.

GRADUAL FALL

Deficit of 17 Euro zone governments fell to 4.1% of GDP in 2011 from 6.2% in 2010   In 27 EU nations, deficit shrank to 4.4% in 2011 from 6.5%a year earlier   17 EU nations had deficits above 3%

Ireland - Deficit shrank to 13.4% of Gross Domestic Product (GDP), from 30.9% in 2010 Germany - Deficit slid to 0.8% of GDP from 4.1% Greece - Deficit declined to 9.4% of GDP from 10.7% in 2010 Britain - 7.8% of GDP France - 5.2% Italy - 3.9%

25 PSU heads to meet Prime Minister today

Capital expenditure plans on the agenda

Heads of 25 major public sector undertakings (PSUs) will meet Prime Minister Manmohan Singh tomorrow to discuss capital expenditure plans, as well as issues hurting growth of their respective industries.

According to an official release, investment plans will be discussed during the meeting.

Among those who will meet the prime minister are the chairmen of Air India, Bharat Heavy Electricals, Coal India, GAIL, Indian Oil Corporation, NTPC, Power Grid Corporation, Steel Authority of India, Shipping Corporation of India and Indian Railways Finance Corporation.

This is the first such meeting between PSU heads and the PM, on the lines of the annual parleys heads of major private sector companies have with the PM on their concerns.

Heavy Industries and Public Enterprises Minister Praful Patel told Business Standard: “Autonomy of PSUs and disinvestment will be discussed."

Patel said there were many PSUs with the capacity to go global but were constrained by over-regulation.

Patel also said some PSUs had complained their view was not sought when it came to divestment.

“They are in favour of disinvestment. But their point of view does not get much attention,” said Patel.

The government has set a target of raising Rs 30,000 crore through disinvestment this financial year.

However, no disinvestment has been carried out so far this year.

“If markets are stable, the government will be able to meet the target of Rs 30,000 crore,” said Patel.

India has 248 central public sector enterprises.

These companies together registered an 18 per cent growth in turnover at Rs 14,73,000 crore in FY11.

Of these, 45 listed companies together account for 22 per cent of the total market capitalisation of all the companies listed on the BSE.

Patel added he was willing to discuss with the prime minister that the limits on Maharatna and Navratna companies should be revised.

ON TALKS TABLE

Autonomy of PSUs and disinvestment to be discussed with Prime Minister Meeting likely to be attended by chairmen of Air India, Bharat Heavy Electricals Limited, Coal India, GAIL, Indian Oil, NTPC, Powergrid Corp, Steel Authority of India, Shipping Corporation of India and Indian Railways Finance Corporation Government has set a target of raising Rs 30,000 crore through disinvestment this financial year. However, disinvestment in not a single company has been carried out so far India has a total of 248 Central public sector enterprises, which together registered an 18-per cent growth in turnover at Rs 14,73,000 crore during 2010-11

Govt worries on keeping fiscal deficit at 5.1% of GDP renewed

Spectrum auction, divestment proceeds likely to disappoint, on top of Kelkar panel's warnings

The government has got renewed worries on its ability to keep the fiscal deficit at around the Budget estimate of 5.1 per cent of GDP during 2012-13, with some telecom operators staying away from the 2G spectrum auction and public sector units chosen for partial divestment developing cold feet.

The finance ministry is working on a fiscal reduction plan involving cutting expenditure, utilising savings from social sector schemes, keeping supplementary demands to the minimum, rationalising subsidies and shifting some of the year’s final quarter liability to the next financial year.

After the steel ministry did not agree to sell equity of Rashtriya Ispat Nigam Ltd (RINL) — the first company listed for divestment this year — below its book value of Rs 22 a share, leading to deferment of its proposed stake sale, some other ministries are also believed to have expressed reservations on offering equity in PSUs under them in the current market conditions.

Officials said Finance Minister P Chidambaram and Cabinet Secretary Ajit Seth have begun deliberations to address the issue, failing which the year’s disinvestment target of Rs 30,000 crore will be missed.

On Friday, Reliance Industries and Sistema were among the telecom operators which did not apply to participate in the spectrum auction. As a result, companies are not expected to bid very high. The finance ministry is not expecting more than Rs 35,000 crore from the auction, against the target of Rs 40,000 crore.

Subsidies are likely to overshoot the Budget target of Rs 1.9 lakh crore by at least Rs 50,000 crore. The requirement for food subsidy has already swelled to Rs 1,01,879 crore in the first six months of 2012-13, about 36 per cent more than the Budget estimate of Rs 75,000 crore. Under-recoveries of oil market companies are estimated at Rs 1,67,415 crore and more than half of it is likely be paid by the government.

There might also be some shortfall in tax collections, due to a slowing in economic growth. Till August, only Rs 1.75 lakh crore could be mobilised, 22.7 per cent of the tax revenue target for the year. The September figures have been officially issued but those in the know said indirect tax collections rose 15.6 per cent to Rs 2.17 lakh crore over April-September, against the annual target of a 27 per cent growth. However, net direct tax collections grew 16.3 per cent at Rs 2.26 lakh crore, against the annual target of 13.9 per cent growth, largely due to lower outgo on refunds.

The Kelkar panel, in its recent report on fiscal consolidation, recently said the Budget estimate for revenue was higher by Rs 60,000 crore than it should have been, while subsidies could shoot up by Rs 70,000 crore. It said only Rs 10,000 crore was expected from disinvestment. However, these estimates were in the context of a worst case scenario.

“If the revenue is overestimated (in the Budget), so is the expenditure. We are expecting savings of at least Rs 30,000-40,000 crore on the Plan side. Besides, we have to take care of the additional demands arising mainly till the end of the December quarter. Some of the liabilities for the January-March quarter can be shifted to the next financial year. So, there will be arrears in the next fiscal,” said a ministry official.

Of Rs 100,000 crore food subsidy demand, around Rs 22,000 crore is the arrears carried over from 2011-2012. The arrears could swell to around Rs 40,000 crore for the current financial year, as till date the government has allocated just Rs 62,000 crore. Similarly, Rs 43,000 crore provided as fuel subsidy in the Budget for 2012-13 has already been used up, in clearing last year’s dues.

The Budget estimate pegged the Centre’s fiscal deficit at 5.1 per cent of GDP for 2012-13. In absolute terms, it was estimated at Rs 513,590 crore. Of these amounts, the fiscal deficit has already constituted 65.7 per cent of the estimated total in the first five months of 2012-13. The percentage at the corresponding period of last year was slightly higher, at 66.3 per cent; however, the deficit was projected at 4.6 per cent of GDP in 2011-12 in the Budget estimate but it finally shot up to 5.76 per cent.

Early-bird results point to revival in earnings growth

Re rise, slower growth in interest outgo help aggregate profit of 192 firms grow 20%

India Inc is set to turn in a handsome performance in the quarter ended September, if the early trend persists. Tata Consultancy Services (TCS), ITC, Ambuja Cements, HDFC Bank and Bajaj Auto are among companies that beat analyst estimates by reporting better-than-expected net profit growth.

An analysis of the 192 early birds (including banks and financial services companies) shows net profit has risen 20.7 per cent year-on-year, the best growth seen in the past four quarters. However, sales growth at 18.3 per cent was slightly lower than the 19-20 per cent seen in the previous two quarters.

The sample, however, is still small as it includes only six of the 30 Sensex companies — Infosys, Reliance Industries, HDFC Bank, TCS, ITC and Bajaj Auto — that have declared results so far. These 192 companies together accounted for 25 per cent of the total market capitalisation of the Bombay Stock Exchange.

Operationally, profit margins of manufacturing companies fell to 18.5 per cent from 19.5 per cent in the year-ago quarter. That’s because raw material costs of these companies rose 21 per cent. Given the benign demand environment, it hasn’t been easy for companies to pass on the increase in costs to consumers, which is reflecting on their profit margins. The good part is the escalation in raw material costs is subsiding due to softening of commodity prices.

At the net level though, the 192 companies have posted better-than-expected profit growth during the quarter, thanks to rupee appreciation (read: forex gains) and slower growth in interest costs (up one per cent versus 18 per cent sales growth for manufacturing companies).

If one excludes Reliance Industries (RIL), the performance is even better, with net profit growth of 30 per cent and sales growth of 20 per cent. RIL, India’s highest valued company, accounts for one-fourth of the total sample net profit.

“After a steady decline over five quarters through December 2011, profitability has begun to pick up again in the last two quarters and is expected to increase somewhat. This is primarily on account of softening in commodity prices and interest rates, and bottoming out of the growth slowdown,” according to rating agency CRISIL.

CRISIL, however, believes there is limited risk of any further decline in corporate margins in the coming quarters, given the softening of commodity prices, supported by an appreciating rupee and decline in interest rates. Flexibility to defer capex will also help players offset profitability pressure.

Mid-sized and small companies such as Dish TV, Indo Rama Synthetics, Indian Metals and Ferro Alloys and Heidelberg Cement have done better by reporting profits against losses in the previous year's quarter, while Shree Cement, Karnataka Bank, GMDC, Essar Ports and Sintex Industries have posted a stellar performance by reporting over 75 per cent growth in aggregate net profit.

Sector trends show cement, FMCG, mining, banks and IT have delivered better-than-expected results, while power and fertilisers reported disappointing earnings growth.

IT companies have reported a robust 32 per cent profit growth on the back of strong performances by TCS and HCL Technologies, due to rupee appreciation and robust dollar revenue growth on account of new deal signings. Cement firms saw net profit more than double to Rs 1,337 crore from Rs 646 crore driven by greater-than-expected improvement in net realisation, consequent to firm prices and easing in costs.

“Cement demand is likely to grow over eight per cent linked to the government’s focus on infrastructure development; however, the surplus scenario is expected to continue over the next three years,” according to UltraTech Cement.

Five private banks, which have declared results so far, have posted an average 30 per cent jump in net profit on the back of higher growth in the retail loan book. NIMs (net interest margins) were relatively better, while the uptrend in NPAs (non-performing assets) is showing signs of tapering.

Weekly Stock Outlook

Bank Stocks Outlook:

Action seen stock-specific: RBI policy eyed Shares of banks are likely to move a narrow range with a positive bias next week on hopes the Reserve Bank of India will slash key rates in its monetary policy review on Oct 30.

FMCG Stocks Outlook:

Shares of fast moving consumer goods companies are seen outperforming the broader market this week on expectations of good earnings in the quarter ended Sep 30.

Oil Stocks Outlook: 

Cairn in focus; oil retailers seen subdued Shares of state-owned oil marketing companies are likely to remain subdued next week as the focus shifts to companies announcing earnings for the quarter ended September.

Capital Goods Stocks Outlook:

To eye L&T's Jul-Sep results due Mon Shares of most capital goods and engineering companies are likely to take cues from Larsen & Toubro's Jul-Sep earnings on Monday, dealers said.

Telecom Stocks Outlook:

To trade in narrow range next week Telecom stocks are expected to trade in a narrow range next week, and investors would keep a close watch on Cabinet decision over one-time spectrum fee, likely to be taken in the coming week.

Auto Stocks Outlook:

To track Jul-Sep result; Maruti seen positive Earnings for the Jul-Sep quarter will drive and lend direction to shares of frontline automobile companies in the coming week, according to market participants.

IT Stocks Outlook:

Performance seen stock-specific next week Performance of major information technology companies' shares is likely to remain stock-specific next week, with investors closely watching their Jul-Sep earnings, analysts said.

Pharma Stocks Outlook:

To track Jul-Sep result; Lupin seen positive Action in the pharmaceutical counter is likely to be stock-specific next week, as companies will detail their quarterly earnings, market participants said.

Steel Stocks Outlook:

Down next wk; demand low, earnings seen weak Shares of major steel companies may decline slightly next week as they are expected to report disappointing Jul-Sep earnings amid continued sluggishness in demand, analysts said.

Cement Stocks Outlook:

Seen rangebound next week; UltraTech eyed Shares of major cement companies are likely to remain rangebound next week after an action-packed week where heavyweights ACC and Ambuja Cements announced lower-than-expected earnings for Jul-Sep, analysts said.

TCS Shows Way Again,Net Rises 49% to 3,434 cr

Indias top software exporter continued to set the pace for the industry during the second quarter ended September,providing reassurance that there is ample demand for those willing and able to seize opportunities.

Tata Consultancy Services revenues grew 4.6% from a quarter ago to.15,621 crore,and net profit firmed up 49% to.3,434 crore year-on-year.The company said spending by clients on essential and discretionary projects continues apace in the new normal of an uncertain economic environment.

Based on our discussion with clients,the environment is good.Projects are on track and deals are getting closed, Chief Executive N Chandrasekaran said.His observation,if anything,was more positive than in the previous quarter.

Shares of TCS closed 1% lower at.1290.30 on the Bombay Stock Exchange on Friday,ahead of its results announcement that came after market hours.Analysts said the only negative was its operating profit margin in the second quarter that fell to 26.8%.The company attributed the decline to a greater share of revenue from emerging markets where pricing is not as high as in the United States or Europe.TCS,and fourth-ranked HCL Technologies,which announced its first-quarter results on Wednesday,have been by far the most optimistic of Indias IT service providers.Neither company prognosticates earnings numbers but management commentary and performance stand in contrast to their more pessimistic Bangalore-based rivals.

Infosys has been struggling to come to terms with a management shakeup last year and what is perceived as its risk-averse attitude.Wipro,too,saw change at the top last year and chief executive TK Kurien has had his hands full trying to sharpen the companys focus on sales.

Will provide only 6 subsidised cylinders in all states: OMCs

The 3 govt-owned OMCs-IndianOil, BPCL and HPCL-together meet the country's entire LPG cylinder demand

After consumers exhaust the year’s quota of six subsidised liquefied petroleum gas (LPG) cylinders announced by the Union government, oil marketing companies (OMCs) would charge them at the market rate for additional cylinders. This is despite several Congress-ruled states saying they would provide three additional subsidised cylinders. For these states, OMCs want the price differential for the cylinders to be transferred directly to consumers.

“We are governed by the central government and, as directed last month, we will bill the seventh domestic cylinder at market rates, irrespective of what states wish to offer to its citizens,” said a senior OMC executive.

“If any state wants to grant additional subsidised cylinders, it will have to pass on the subsidy directly to consumers. States need to evolve a mechanism of compensating the difference on three additional cylinders directly to consumers,” said M Nene, director (marketing) at Indian Oil, which services about 45 per cent of the domestic LPG market. Nene added it didn’t make economic sense if OMCs had to provide three additional subsidised cylinders in a number of states and bear the interest burden till the amount was reimbursed to them by states.

On September 13, the Union government had announced a consumer would get up to six subsidised cylinders (currently Rs 410 a cylinder in the capital). It added consumers would have to pay Rs 894 for every additional cylinder. For the period between September 13, 2012 and March 31, 2013, all consumers are eligible for three subsidised cylinders; they have to pay market prices for additional ones. Most Congress-ruled states, including Haryana, Maharashtra, Assam and Delhi, had announced three additional cylinders to consumers at subsidised rates. Interestingly, no state government is learnt to have approached OMCs to work out the modality for this.

The three government-owned OMCs—Indian Oil, Bharat Petroleum and Hindustan Petroleum—together meet the country’s entire LPG cylinder demand. An OMC official said the provision of three additional cylinders at subsidised rates would be a “poor model”. The executive cited the example of the ‘Deepam’ scheme by the Andhra Pradesh government. Then, the company had faced hurdles in securing payments from the government.

The Andhra Pradesh government had launched the scheme in 1999 to distribute a million LPG connections to women in rural, below-poverty-line families.

Govt decides in principle to let Reliance Industries raise KG gas price

The government has decided in principle that Reliance Industries (RIL) can raise the price of gas from the Krishna-Godavari (KG) basin.

A recent high-level meeting convened at the Prime Minister’s Office decided that RIL can begin negotiations with the petroleum ministry on fresh pricing for the gas currently being sold at $ 4.2 mmBtu.

The company had asked for re-negotiating a revised formula with the ministry under the production sharing contract which governs their mutual relationship. “On the issue of price revision, the meeting required that the process of price discovery may be allowed as per the provisions of the (contract) ,” a source told The Indian Express.

However no decision was taken on whether the Comptroller and Auditor General (CAG) should be allowed to inspect RIL’s books.

The move will come as a relief for India’s largest company by market cap. RIL share prices have moved in a narrow range amid concerns that output from the KG basin has been continuously dipping since 2010.

The government and RIL have traded charges with the company claiming that brakes on capital expenditure has hampered work on fresh discovery of reserves. The government in turn has claimed that higher expenditure will cut down its revenue share known as profit petroleum.

RIL in a letter dated January 6 to the PMO had stated that it wanted to exercise its contractual right to market natural gas on the basis of arm’s length competitive sales to “benefit all the parties under the production sharing contract including the government”. It also described the current price of KG-D6 gas as a “sub-market” price.

The price was set by an empowered group of ministers headed by former finance minister Pranab Mukherjee. RIL said that it has invested about $8 billion in the KG D6 fields, and that it has legitimate expectations of a free market with the ability to obtain competitive arm’s length prices.

On the audit of RIL’s books, petroleum Secretary GC Chaturvedi said that the bipartisan D6 management committee headed by Director General of Hydrocarbons has agreed to all the developmental proposals made by the contractors. “But the finalisation of the decision is pending due to the contractor’s refusal to allow audit by the CAG.”

Half Barrel Empty,Half Barrel Full

The troubles in Reliance Industries trophy gas block have created a piquant situation of the partners speaking in different tones.Reliance refuses to see the good side until it sees it,while BP prefers to see the good side only,report Soma Banerjee and Arijit Barman 

It was a rare victory in a season of defeats for a company that is used to winning.Yet,this January,a government nod to Reliance Industries Limited to start drilling in a patch of land next to its trophy oil and gas blockits first clearance in 26 monthsdrew a guarded response from the company.We will wait for the fineprint, a senior RIL executive,speaking on the condition of anonymity,told ET the following day.Such is the animosity that has built between the oil ministry and RIL over the past two years that small details are clouding the big picture for Indias largest private sector company.

In contrast,BP,RILs foreign partner in a $9 billion tie-up,is still talking only about the big picture and treating the small details as just thatsmall details that will be drilled through.BP is fully committed to its partnership with RIL in India, says Sashi Mukundan,who heads BP in India.D6 (the trophy block) continues to be our main focus. 

On October 12,the $376 billion British multinational launched its first-ever corporate campaign in India,20 months after it bought 30% in 21 oil and gas blocks of RIL for $7.2 billion (plus a commitment to invest another $1.8 billion).Its a familiarisation exercise, says Anshul Mathur,vice-president-communications & external affairs,BP India.We have done it across emerging markets,in Russia and Brazil,even in China. 

The timing of this image-building exercise coincides with a subtle change in tenor in the engagement of the government with RIL-BP for their oil and gas assets in the Krishna-Godavari basin,off the coast of Andhra Pradesh.Things have moved ahead in the past two months.The negative news flow has also gone down, says Niraj Mansingka,oil & gas analyst,Edelweiss Securities.But I do not see an immediate turnaround. 

A period of marked hostility between the two sidesfuelled by a drop in gas output differences over costsis giving way to an uneasy truce.The Prime Ministers Office (PMO),in an internal communication seen by ET,has earmarked this project for priority decision-making.

Government clearances to this project are resuming,though several crucial ones remain.The government auditor,which posed prickly questions to RIL about its project management and costing,is being ringfenced.And oil minister Jaipal Reddy,under whose watch the project has faced scrutiny and lost pace,might be moved in a cabinet reshuffle expected later this month.

Yet,in contrast to BPs hope-filled stance,RIL remains cautious and combative.Generally speaking,the governance system has become restrictive rather than being facilitating, says an RIL spokesman.We rather hope not,but there is a possibility that future projections might be affected if such restrictive practices continue. 

The contrast also reflects the different stakes and business compulsions for RIL and BP in the Indian energy landscape.For RIL,its oil and gas exploration assets in Indiawhich accounted for about 6% of its 3,39,792 crore revenues ($66.8 billion) in 2011-12were to power its growth and profitability from 2009 onwards.Instead,RIL has managed peak production of only 75% of what it initially estimated and is currently pumping out only 35%.Since January 2011,when the troubles at the block and with the government started,the RIL stock has fallen 23% in a broad market that is down 9.2%.

If Mukesh Ambani-headed RIL is the insider that is peeved at being treated like an outsider,BP is the outsider that wants to be accepted.The worlds third-largest energy company upped its presence in India in the backdrop of a damaging oil spill in the Gulf of Mexico,which has cost it $26 billion till date,and a reputation for falling foul of governments.India will matter,and it will matter even more in the future,until BP sorts out US liabilities/ exposures from Macondo (the location of the spill),and manages to clarify what it is (or isnt ) doing in Russia, says Matthew Hulbert,lead analyst at European Energy Review,a Netherlands-based energy publication.

BPs Course Correction 

Hulbert feels BP has rushed into India and overpaid.BP didnt properly understand the political/regulatory risks in India when it was desperately looking for new markets after Macondo, he says.Progress with Reliance has been glacial at best,production is down,and other partners seem pretty concerned that the geology of the blocks isnt as promising as first thought. RILs original gas-production target for April 2012 was 80 million metric standard cubic metres per day (mmscmd ) from 31 wells.This peaked in the quarter from April-June 2010,at 59.1 mmscmd.And it has since been falling,to 28.5 mmscmd in the quarter ended September 2012.

For some time,RIL and its two partnersBP (30% stake) and Canadas Niko (10% stake)made different assessments of gas in the D1 and D3 fields.These are two of the three fields in the D6 block that have been developed till now.More will follow,though the number cant be ascertained.The three partners maintain that D6 remains the golden block.They are now also on the same page on the D1 and D3 fields: extractable reserves are 3.6 trillion cubic feet (tcf),against the original estimate of 11 billion tcf (including probable reserves); of this,2 tcf has been pumped out.Also,the venture has been surrendering blocks.It had 23 blocks when BP announced its investment.When it received clearance,this was down to 21.In recent months,it has given up 9 blocks,and is left with 12 blocks,of which D6 is one.

According to BP,giving up blocks is a standard E&P (exploration and production) practice.An oil analyst with a foreign brokerage who did not want to be quoted as he is not authorised to speak to the media confirms this practice.Indian basins are not as productive as we thought, he adds.Exploration is also capital-intensive.This analyst estimates it costs $200 million and takes 60 days to prospect a well.RIL also feels it is too much of a headache to spend time and money in unproductive blocks. Analysts feel BP may have another headache looming.BP has not said much on the Indian assets so far, says Mansingka of Edelweiss.Adds Hulbert: At $7.2 billion,this was always a pretty large chunk of change for BP under normal circumstances.Right now,they seriously need to start convincing the city of London (the stock market there) that they havent paid massively overpaid. 

And New Energy 

Mukundan of BP says the company is looking at three areas in its partnership with RIL: developing the gas fields that have been discovered,resuming exploration,and setting up a gas marketing joint venture for India.The JV is expected to finalise its investment plans by 2013 and start operations by 2015.

BPs play on the consuming side will be interesting, says Anish De,CEO,Asia,at Mercados EMI,an energy consulting company.Getting a toehold in gas marketing and LNG imports will be critical in their strategy.But its a market where you have to stay invested in,build infrastructure,sign long-term offtake contracts. 

BPs corporate campaign BP in India there is energy in this partnership makes a long-term pitch.Its more of a trust issue.If a company is having a difficult time,then its important to reposition your brand, explains Wilfried Aulbur,managing partner India with Roland Berger Strategy Consultants,which also helps MNCs with their market entry strategy.Goodwill is important in a high-risk sector like oil and gasconnecting with all stakeholders is important even in a business-to-business model.You need to convince all about your staying power. Vandana Hari,editorial director of Platts Asia,a global provider of energy data,does not believe a corporate campaign will solve BPs problems on the ground.I cannot see a major payoff immediately.But its an investment for tomorrow,when they enter LNG, she says.Whatever its objectives,BP is stepping on the gas after a relatively muted India entry.Besides being seen more in the media,its officials,who were content to stay behind the scenes in the JV,are more frequently spotted with the RIL brass in government corridors.A storm is brewing here, says Hulbert.BP wants (and needs) that money to work far faster than Indian bureaucracy can ultimately cater for,with or without epic blackouts. 

Mukundan,who has been with BP for over two decades now,was appointed the India head in 2009.He was instrumental in BP entering exploration as well as starting LNG trading in India.The reading of Deven Choksey,managing director of KR Choksey Securities,is that bigger changes might be coming at BP India.These are pre-emptive moves to bring in a proactive management, he says.The government must have given an indication that they will soon break the current deadlock. 

RILs Two Issues 

Even if the deadlock is broken,more than BP,it will come down to RIL.In India,it (BP) is not the operator or a majority stakeholder, says a Hong Kong-based energy analyst on the condition of anonymity.So the right way to go about it is to let RIL do the talking. 

Earlier this month,ET reported that the RIL board of directors was discussing putting investments in Indias oil & gas exploration assets on hold till the government agreed to remove the cap on the price of natural gas and approved its capital expenditure plans.We are awaiting clarity on gas pricing policies and are keen to invest (in India) once there is a firm decision, PMS Prasad,an executive director on the board of RIL,had said then.

Simultaneously,RIL is investing more in oil and gas abroad.Earlier this month,RIL tied up with Venezuelas state oil company Petroleos de Venezuela (PDVSA) to invest $8 billion to develop oilfields of the Orinoco Oil Strip in Caracas.Analysts tracking RIL regard the move to freeze or delay investments as a pressure tactic.They are trying every trick in the bookfrom lobbying to repeated letters to policymakers and visits by the companys top brass to get policy clarity, one analyst said on the condition of anonymity.

The first issue is gas price.RILs present fiveyear contract,under which its K-G Basin gas is sold at $4.2 per unit,comes up for renewal in April 2014.RIL wants a higher price as this was benchmarked to a crude oil price of $60;today,crude is at $115 a barrel.Also,it contends,though gas costs $3.2 per unit today in the open market,importing ita process that involves converting it into liquid form,transporting it and reconverting into a gaseous formwill increase the cost to $12 a unit.

The pricing issue is with an empowered group of ministers (EGoM); a committee,led by former RBI chief C Rangarajan,is currently looking into this issue.Political compulsions are not allowing the government to take a hard call.They do not want to be seen favouring Reliance, says Choksey.I feel after the winter session (of Parliament) and Gujarat elections,gas prices will be revised upwards,.The analyst with the foreign brokerage says RIL doesnt expect clarity before June 2013.

The second issue is capital expenditure.As per the production-sharing contract (PSC) signed between the government and RIL,the company is supposed to recover its costs,before starting to share a greater portion of its revenues with the government.RIL had projected,and the government had approved a capital expenditure of $8.5 billion for 80 mmscmd.So far,RIL has spent $5.6 billion,but it is producing only 28.5 mmscmd.The government has disallowed RIL cost recovery of $1.6 billion,citing shortfall in production.This is delaying decision-making and creating uncertainty on the way forward.There are several instances where the government is deviating from the PSCs,or we are being forced to deviate from the contract,by taking on obligations beyond the contract, says the RIL spokesman.

Last week,RIL said it was capping its investments,for now,at $5.6 billion.This does not give it much headroom to invest in new fieldsand grow.In both gas pricing approval and development plan approval,I still see uncertainty, says Mansingka of Edelweiss.The worst-case scenario is status quo,the best-case scenario is (increase in) production from June 2015. The stakes are high for both companiesprimarily financial for RIL and reputational for BPand they are both dealing with it in their own ways.

Controlling inflation is important, says Gokarn

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn said even though monetary policy has a limited role in controlling inflation emanating from the supply side, the rise in prices cannot be ignored. He said monetary policy cannot alone be held responsible for slowdown in growth.

“Its important to keep inflation under control in order to support sustained process of growth,” he said at the FT-YES Bank International Banking Summit. He said inflation needed to be controlled whether by a combination of supply side or monetary side policies. “But the objective of controlling inflation is important,” he said.

The comment comes two weeks before the announcement of the second quarter monetary and credit policy, due on October 30.

The latest inflation data shows the wholesale price index (WPI) for September stood at 7.8 per cent, the highest in the past 10 months. RBI has been hesitant in easing monetary stance due to concerns over persistent inflation. This has drawn criticism from several quarters that the slowdown in growth is due to high interest rates.

According to Gokarn, in the past five years, India has seen both domestic and global upheavals that have impacted growth. Therefore, to attribute the slowdown in growth to monetary policy exclusively is misperceived, he said. “It would be great if fiscal and supply side policies also helped to keep inflation pressure down and in our case with respect to food prices, pressure has been more persistent,” said Gokarn. He added the argument that monetary policy has no role in controlling supply side inflation is also not valid.

Rising inflation makes it tough for RBI to reduce repo rate

The central bank may instead look at further reducing the cash reserve ratio

With inflation remaining high in September, it will be difficult for the Reserve Bank of India (RBI) to reduce the key policy rate to give a push to sagging economic growth. Bankers and analysts said the government had sent a clear signal to slash interest rates to kickstart growth. For RBI, however, fighting inflation remains top priority, making revising the repo rate tough.

IDBI Bank Chief General Manager (Treasury) N S Venkatesh said the current reading of inflation and the trade deficit did not provide room for the repo rate cut in the second quarter review.

The option before RBI is to reduce the cash reserve ratio, the amount banks keep in cash with RBI. It had kept the repo rate — at which banks borrow from RBI — unchanged at eight per cent in the mid-quarter review in September.

RBI, however, had cut CRR by 25 basis points from 4.75 per cent to 4.50 per cent. This led to the injection of Rs 17,000 crore into the banking system.

Inflation rose 7.81 per cent in September from a year earlier as prices of potato, pulses, wheat and sugar soared. The impact of increase in diesel prices is partly reflected in the figures.

Leif Eskesen, chief economist for India & Asean, HSBC, said, “Headline inflation rose more than expected and core inflation remains firm. This ought to make RBI careful about easing the rates until inflation risks have receded sufficiently and fiscal policy is back on track”.

Inflation soared after the government increased diesel prices by Rs 5 a litre on September 13. The recent appreciation in the rupee, if sustained, is likely to relieve some pressure from core inflation in the coming months.

Rating agency CRISIL said overall wholesale price index inflation will continue to remain significantly above RBI’s comfort level of five per cent for the foreseeable future. It will be difficult for the central bank to administer a repo rate cut in its coming policy review.

Barclays said policymakers remain in a tough spot – constrained by high inflation but with a clear need to support growth over the medium term. Core inflation, at over 5.5 per cent, remains a constraint for RBI policy rates.

Of late, the upward adjustment in fuel prices, the slew of other policy initiatives from the government and a pullback in the rupee have offered RBI some breathing room.

The central bank will reduce the repo rate in Q1 2013.

It will continue to focus on supporting liquidity in the near term, with the possibilities of employing open market operations (OMOs) and also reduce CRR, Barclays said.