Rate Hikes by Reserve Bank of India
Manoj Kumar [PGDM FS]
a) RBI hikes repo and reverse repo rates by 25 basis points(1 basis point = 0.1%)(25 Basis point = 0.25%)(100 Basis point = 1%)
b) New Repo rate = 8.25%(up from 8%)(Repo rate is the short term lending rate at which Indian banks borrow from RBI)
c) New Reverse Repo rate = 7.25%(up from 7%)(Reverse Repo rate is the short term lending rate at which Indian banks deposit their excess cash with RBI).
d) This is the 12th hike in rates since last 18 months (March,2010).
e) CRR(Cash Reserve Ratio) remains unchanged at 6%( CRR is cash parked by the banks in their specified current account maintained with RBI)
Importance of(RBI’s) monetary policy review meetings:
Generally news of rate hike are already discounted by the markets but the market waits for the indication which RBI gives during their meeting regarding future economic prospects and future rate hikes.
Important Indications from today's meeting:
RBI has shifted from a strong anti-inflationary bias to a more wait and see mode, with a close eye on the inflation trajectory and global developments.
However, RBI has kept its options open and may consider another hike if inflationary pressures do not come down as expected.
Strong message from RBI to government "If inflation does not come down, the rate hike policy stays"
Reasons for the hike:
1) WPI inflation moves higher from 9.22%(July,2011) to 9.78%(August,2011)
2) No measures taken by government to tackle the supply demand problems.
3) Government's Fiscal policy is working against monetary policy by being too loose
4) Increase in petrol prices will have a spiral effect on all other commodities.
Short term Implications:
For Retail and Corporates:
1) Borrowings money from banks may become costlier.As a result, all loans -- personal and corporate -- are likely to become costlier and home loan EMIs will increase once banks hike their base rate - the rate to which most retail loans are pegged.
2) Economic growth will be affected according to many analyst.
For Banks:
1) If lending rates become high. Bank's core business of lending money will fall(Less credit creation)
2) There are chances that bad loans will increase ((Increase in NPA (Non performing assets)).
For Stock Markets(short term impact):
1) In near term stock markets can go down due to fall in economic growth.Share Markets will wait for next quaterly results for any further major up move.
2) Costlier borrowings will limit the money which goes into stock market.
3) Generally rates hikes are already discounted by the market
Analysis:
1) Near term there will be fall in economic growth but long term growth prospects are intact. This rate hike will affect very few people than the number of people who will be affected by higher inflation.
2) Already no measures are taken by government to tackle the supply demand problems and if RBI also neglect the higher inflation issue, the inflation with become unmanageable and will effect overall Indian
economy.
3) Higher bank rates gives a cushion against any financial crisis( like 2008 crisis) as it gives RBI option to cut rates and provide more and easy liquidy or money,when we need liquidy or money in the system most(Same was done by RBI to save Indian banking system from 2008 financial crisis). (There are fair chances that we can have another financial crisis due to current economic senario in USA and Europe)
a) RBI hikes repo and reverse repo rates by 25 basis points(1 basis point = 0.1%)(25 Basis point = 0.25%)(100 Basis point = 1%)
b) New Repo rate = 8.25%(up from 8%)(Repo rate is the short term lending rate at which Indian banks borrow from RBI)
c) New Reverse Repo rate = 7.25%(up from 7%)(Reverse Repo rate is the short term lending rate at which Indian banks deposit their excess cash with RBI).
d) This is the 12th hike in rates since last 18 months (March,2010).
e) CRR(Cash Reserve Ratio) remains unchanged at 6%( CRR is cash parked by the banks in their specified current account maintained with RBI)
Importance of(RBI’s) monetary policy review meetings:
Generally news of rate hike are already discounted by the markets but the market waits for the indication which RBI gives during their meeting regarding future economic prospects and future rate hikes.
Important Indications from today's meeting:
RBI has shifted from a strong anti-inflationary bias to a more wait and see mode, with a close eye on the inflation trajectory and global developments.
However, RBI has kept its options open and may consider another hike if inflationary pressures do not come down as expected.
Strong message from RBI to government "If inflation does not come down, the rate hike policy stays"
Reasons for the hike:
1) WPI inflation moves higher from 9.22%(July,2011) to 9.78%(August,2011)
2) No measures taken by government to tackle the supply demand problems.
3) Government's Fiscal policy is working against monetary policy by being too loose
4) Increase in petrol prices will have a spiral effect on all other commodities.
Short term Implications:
For Retail and Corporates:
1) Borrowings money from banks may become costlier.As a result, all loans -- personal and corporate -- are likely to become costlier and home loan EMIs will increase once banks hike their base rate - the rate to which most retail loans are pegged.
2) Economic growth will be affected according to many analyst.
For Banks:
1) If lending rates become high. Bank's core business of lending money will fall(Less credit creation)
2) There are chances that bad loans will increase ((Increase in NPA (Non performing assets)).
For Stock Markets(short term impact):
1) In near term stock markets can go down due to fall in economic growth.Share Markets will wait for next quaterly results for any further major up move.
2) Costlier borrowings will limit the money which goes into stock market.
3) Generally rates hikes are already discounted by the market
Analysis:
1) Near term there will be fall in economic growth but long term growth prospects are intact. This rate hike will affect very few people than the number of people who will be affected by higher inflation.
2) Already no measures are taken by government to tackle the supply demand problems and if RBI also neglect the higher inflation issue, the inflation with become unmanageable and will effect overall Indian
economy.
3) Higher bank rates gives a cushion against any financial crisis( like 2008 crisis) as it gives RBI option to cut rates and provide more and easy liquidy or money,when we need liquidy or money in the system most(Same was done by RBI to save Indian banking system from 2008 financial crisis). (There are fair chances that we can have another financial crisis due to current economic senario in USA and Europe)
Analysis on Petrol Prices
Manoj Kumar [PGDM FS]
Current crude price: $112.03/Barrel
1$ = 47.32 Rupee
1 Barrel = 158.987 Litre
Crude price per litre in rupees = 112.03*47.32/158.987 = Rs. 33.3439
Other cost involved:
a) Transportation cost(I could not get the aprox. figure)(Within 7 rupees)
1- OPEC countries to India(Oil refinery companies)
2- Indian oil refinery companies to Oil Marketing companies
3- Finally from oil marketing companies to Petrol pumps
b) Refinery cost(actual refinary cost within 1.5 rupees)(But need to add the margin which is paid,as refinery is a capital intensive investment,I could not get the figure)(Total 10 to 15% of crude price)
c) Dealer cost paid to the petrol pumps(Aprox. 1.25 rupees)
So Over all cost without taxes = Rupees 45 maximum
Taxes
• Excise duty : 14.35 rupees per liter
• Customs duty :0 percent (Came down to 5% from 7.5%, now completely removed)(It was charged on both crude as well as desil and petrol)
• Sales tax or VAT : 20 percent.
So Overall cost with taxes = Between 65 to 72 rupees
Now the question why do we need to pay the extra money or why do government charge the extra taxes on petrol:
i) There is a fuel with very low calorific value (Generates less energy compared to others) which is only used in few Asian countries, guess what.... It’s called Kerosene. 10 to 15% of the entire crude we consume is used for making Kerosene and that too at a very subsidized rate. So that put additional burden on crude supply.
ii) Petrol and diesel have same calorific value and cost of production is also same. But still it has to be sold at subsidized rate compared to petrol
iii) Subsidized Retail LPG cylinder currently costs between rupees 370 to 400(additional Rs. 40 subsidy to BPL family in many states), actual cost is more than Rs. 700.
When compared with India’s neighboring countries, the prices of petrol and diesel are higher but the cost of kerosene and LPG are much lower. The consumer price of Kerosene in India’s neighboring countries(India Between Rs. 14 to 15) :
1. Rs.35.97/litre in Pakistan
2. Rs.29.43/litre in Bangladesh
3. Rs.21.02/litre in Sri Lanka
4. Rs.39.24/litre in Nepal.
The consumer price of LPG in India’s neighboring countries :
1. Rs.577.18/ cylinder in Pakistan
2. Rs.537.37/ cylinder in Bangladesh
3. Rs.822.65/ cylinder in Sri Lanka
4. Rs.782.84/ cylinder in Nepal (source)
iv) Value of money in various places is different: Many times we see prices of petroleum products in many countries half or one-third of prices that are in India(PETROL PRICES... Pakistan Rs. 26.... Bangladesh Rs. 22 ...... Cuba Rs. 19..... Nepal Rs. 34 ..... Burma Rs. 30 ..... Afghanista n Rs. 36) . But the reallity is, In order to earn the money in those country, one needs to work 4-5 times harder, than one has to work for the same amount of money in India. To make it simpler, Value of Rs. 100 in Mumbai is different from value of same Rs. 100 in some remote village in India i.e. one can get more in a remote village that in Mumbai with same 100 rupees.
Final Thoughts:
We need to assume our government as a non-profit organization, increasing rates or taxes certainly means government has to take care of some expenses which have increased. Infact government is doing more than just balancing the credit and debit side of balance sheet. We still have a huge fiscal deficit, that means our government is still spending more than what it receives. Reducing the cost of petrol or diesel is not in our hand but saving and optimal use of the petroleum products is in our hand. Important Fact: 10-15% of fuel in India is wasted in traffic signals, improper maintenance of vehicles.
Current crude price: $112.03/Barrel
1$ = 47.32 Rupee
1 Barrel = 158.987 Litre
Crude price per litre in rupees = 112.03*47.32/158.987 = Rs. 33.3439
Other cost involved:
a) Transportation cost(I could not get the aprox. figure)(Within 7 rupees)
1- OPEC countries to India(Oil refinery companies)
2- Indian oil refinery companies to Oil Marketing companies
3- Finally from oil marketing companies to Petrol pumps
b) Refinery cost(actual refinary cost within 1.5 rupees)(But need to add the margin which is paid,as refinery is a capital intensive investment,I could not get the figure)(Total 10 to 15% of crude price)
c) Dealer cost paid to the petrol pumps(Aprox. 1.25 rupees)
So Over all cost without taxes = Rupees 45 maximum
Taxes
• Excise duty : 14.35 rupees per liter
• Customs duty :0 percent (Came down to 5% from 7.5%, now completely removed)(It was charged on both crude as well as desil and petrol)
• Sales tax or VAT : 20 percent.
So Overall cost with taxes = Between 65 to 72 rupees
Now the question why do we need to pay the extra money or why do government charge the extra taxes on petrol:
i) There is a fuel with very low calorific value (Generates less energy compared to others) which is only used in few Asian countries, guess what.... It’s called Kerosene. 10 to 15% of the entire crude we consume is used for making Kerosene and that too at a very subsidized rate. So that put additional burden on crude supply.
ii) Petrol and diesel have same calorific value and cost of production is also same. But still it has to be sold at subsidized rate compared to petrol
iii) Subsidized Retail LPG cylinder currently costs between rupees 370 to 400(additional Rs. 40 subsidy to BPL family in many states), actual cost is more than Rs. 700.
When compared with India’s neighboring countries, the prices of petrol and diesel are higher but the cost of kerosene and LPG are much lower. The consumer price of Kerosene in India’s neighboring countries(India Between Rs. 14 to 15) :
1. Rs.35.97/litre in Pakistan
2. Rs.29.43/litre in Bangladesh
3. Rs.21.02/litre in Sri Lanka
4. Rs.39.24/litre in Nepal.
The consumer price of LPG in India’s neighboring countries :
1. Rs.577.18/ cylinder in Pakistan
2. Rs.537.37/ cylinder in Bangladesh
3. Rs.822.65/ cylinder in Sri Lanka
4. Rs.782.84/ cylinder in Nepal (source)
iv) Value of money in various places is different: Many times we see prices of petroleum products in many countries half or one-third of prices that are in India(PETROL PRICES... Pakistan Rs. 26.... Bangladesh Rs. 22 ...... Cuba Rs. 19..... Nepal Rs. 34 ..... Burma Rs. 30 ..... Afghanista n Rs. 36) . But the reallity is, In order to earn the money in those country, one needs to work 4-5 times harder, than one has to work for the same amount of money in India. To make it simpler, Value of Rs. 100 in Mumbai is different from value of same Rs. 100 in some remote village in India i.e. one can get more in a remote village that in Mumbai with same 100 rupees.
Final Thoughts:
We need to assume our government as a non-profit organization, increasing rates or taxes certainly means government has to take care of some expenses which have increased. Infact government is doing more than just balancing the credit and debit side of balance sheet. We still have a huge fiscal deficit, that means our government is still spending more than what it receives. Reducing the cost of petrol or diesel is not in our hand but saving and optimal use of the petroleum products is in our hand. Important Fact: 10-15% of fuel in India is wasted in traffic signals, improper maintenance of vehicles.