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Will the rupee end the year above 60 to the dollar? Fall season for the rupee Dark times for the power sector Policy Updates Policy Roadmap Number View
The options for the Reserve Bank of India (RBI) and the finance ministry have dropped off considerably since June 19 when US Fed chief Ben Bernanke signalled that the quantitative easing policy could begin to ease off. The RBI on July 15 moved two key interest rates the marginal standing facility and the bank rate to 300 basis points above the repo rates to make the rupee costlier to punt on.
A week earlier, again a Monday, it cut room for banks to carry out proprietary trading in the currency futures, exchangetraded currency or options markets. This means it has crimped the size of the rupee derivatives market temporarily. The options now include: a) More of the same, ie, raising rates further and/or squeezing market volumes b) Making it mandatory for exporters and those raising foreign debt to bring their foreign currencies back home c) Egging on banks to offer higher interest rates on nonresident foreign exchange denominated accounts d) Raising of forex borrowing on government or public sector bank accounts To take a call on any or all of these, the RBI will obviously be guided by an underlying estimate of where the rupee is headed and how fast. The markets too have an estimate. This is reflected in the one-month futures in the currency markets, all of which were trading above 60 at the time of writing. If the RBI too is comfortable with that and focuses instead on the volatility in the markets, then it is unlikely to do too much. Selling dollars to cut down intra-day swing is what it would aim at.
Does it have the reserves to do so? At $280 billion, the bank is running a cover of less than seven months for imports, so the maximum it could deploy at any stage is less than $30 billion. Among BRIC countries, this is the smallest. Brazil and Russia, for instance, have 19 months cover (BofA estimates).
To cut down short-term volatility, however, that would suffice. This allied with options a) and b) would be the RBIs arsenal. Options c) and especially d) could, however, become necessary if the fiscal conditions namely the balance of payments worsen. India ran a current account deficit of 4.8% in FY13 and estimates for FY14 are 4.3% to 4.5 %. This means an uncovered liability of $83 billion to fill up through portfolio and direct investment, besides remittances. Worries on India not pushing growth enough to earn the money to finance this gap has piled on top of money seeping out from emerging market economies to pull the rupee down. Raising interest rates is expected to make debt flows stronger as the differential with rates obtaining in developed markets widens. But the higher rates could make equity flows weaker. Lower interest rates mostly signal an economy with better growth possibilities and, so, robust equity markets. The options for sovereign bond are unlikely to be used immediately as it will be rated and this will set a ceiling for sub-national entities. A public sector bank-led effort to mop up some funds from abroad is the more likely alternative, if at all.
quasi-sovereign banking bases abroad, to guide movements in NDF but those have not delivered. This brings us back to the connection between the rupee and the behaviour of the economy. There are two lines of argument for the RBI to grapple with. A fall in the value of the rupee, some are convinced, will help. A weaker rupee will help services sectors like IT. An early indication of this was Infosys results. It released earnings in line with forecasts, the first time after several quarters, buoyed by a 9% dip in the rupee since June 2013. All such firms earn in forex and pay in rupees. In the manufacturing sector, too, the rupee can help. A cheaper currency means Indian goods will be cheaper abroad. This is significant as India has faced competition from China in this sector due to the labour cost advantage that the latter enjoys. A sustained dip in the rupee of this magnitude can be a game-changer for Indian factories. If entrepreneurs are convinced that the rupee will stay thereabouts with the cost advantage vis-a-vis other Asian economies, it can change the face of Indian manufacturing and create jobs. But the key here is to ensure that capital-labour productivity should not dip off. For the government, this helps instead of offering costly tax set-offs to myriad sectors. Budget FY14 projects total direct tax revenue foregone on this head as Rs 1,13,471 crore or about 9% of total tax receipts. But on the way there are short-term pains. The elections are getting closer and these pains can be expensive.
Weekly closings
54.2688
April 2
54.585
April 9
54.145
April 16
54.385
April 23
India is a net commodity importer; a weaker rupee will widen the current account deficit. Fuel price will rise, raising prices of essentials in turn. A weak rupee will increase the burden of oil marketing companies, which will be passed on to consumers. Those studying abroad will have to shell out more. Expenses, including fees, will shoot up. Foreign travel plans will be hit. Tickets and hotels will get costlier, so will shopping and sightseeing.
53.8088
April 30
54.165
May 8
54.8162
May 14
55.415
May 21
55.965
May 28
56.4525
June 4
58.395
June 11
58.7725
June 18
59.675
June 25
59.5225
July 1
60.615
July 8
59.895
July 15
I believe, due to misinterpretation of [US Federal Reserve Chairman] Ben Bernankes statement and some other factors, all countries with current account deficits have taken a hit on their currencies. But that does not mean the rupee will continue to depreciate. The rupee will find its level. We are concerned about the volatility.
- P Chidambaram, finance minister
Impact
Reduction in foreign institutional investor inflows as the rupees slide has squeezed their margins.
June
FII outflows (in Rs crore) 44,161.8
July*
15,833.9
* Till July 17, 2013
It is a sort of a paradox. On the one hand, the Indian power sector is adding generation capacity. On the other hand, the sectors financial losses keep increasing. At a time when the countrys total power capacity crossed the 100,000 MW mark, the financial losses of the sector at the state utility level were close to Rs 2 lakh crore.
revenues and costs dont match. Buying electricity from other sources like central utilities adds to the costs of a loss-making state utility. The state utility ensures that payments are made to the central utility from its existing revenue stream. In other words, part of the revenues meeting one form of costs can be diverted to meet the additional payment expenses arising out of buying electricity from the central utility. This is how generation utilities are surviving and investments are being made in the form of capacity addition. And this is why financial losses are mounting as the revenues of state utilities are not increasing. But this capacity addition is far behind actual demand. Heres a fact that many are not familiar with. Right up to the mid-1980s, the Indian power sector was seen as a social service. Even under the law, state utilities were not required to make profits. In fact, the ruling legislation required state utilities to meet their costs as far as possible. In the Indian power sector, it is the state utilities that directly deal with the retail consumer. Since they were not required to even break even, electricity lines were drawn out with different objectives. One of the prime objectives in the 60s and the 70s was to ensure that villages had access to electricity in order to irrigate land. As an indirect fallout of the green revolution, low-tension electricity lines were drawn to villages so that they could pump water and irrigate land. While this objective was noble and had social relevance, what really happened on the ground was a disaster that is yet to be rectified. There was no account of how much electricity was being used for the farm sector as it was not metered. Electricity meant for agriculture was being stolen to run small industries. The malaise of power theft spread from rural areas to smaller towns and cities. Investments have come in because the country is starved for electricity and faces huge shortages of it. Most of these investments have been made by either state generation utilities or Central-Government-owned ones. State utilities do not have a payment risk as they have an assured offtake but, more importantly, they are owned by the state government itself. In other words, the generation utilities get adequate payments to keep afloat. Central utilities, on the other hand, have firm power purchase orders with several states and their payment risk is divided among these states. It needs to be mentioned that a loss-making entity doesnt mean that it doesnt have a stream of revenues. It is just that its At the state utility end, what happened was unprecedented. As there was lot of accounted-for power being sold, this either got reflected in sale to agriculture or on to another category called loss on account transmission and distribution (T&D). Now, any electrical engineer would tell you that there is some technical loss that happens when electricity is transmitted through wires. This can be in the region of 3%-9% of electricity distributed, depending upon the quality of wires. However, states reported in the region of 40% to 70%. In other words, around only 30% to 40% of the electricity was being billed! No matter how many interventions were made, this legacy continues, even though the number on T&D losses may be slightly on the lower side now.
What is important to understand is that the subject of electricity has become very political. It is very difficult to charge people for what they consume when they are used to freebies. With rural areas being a popular vote bank, no political party can take the risk of unpopular decisions. An unpopular decision taken by one party is promised to be reversed by the opposition party. That is how the Congress returned to power in Andhra Pradesh in 2004, by promising free power to the agriculture sector. The problem is not in subsidising some deserving sectors. The real problem is that the subsidy promised to the state utility that offers power at concessional rates to certain segments of society as a political compulsion is never paid.
That is why losses mount. You cant increase rates and not get compensated for providing subsidised electricity. And if you want to increase rates, which segment bears the brunt? It cant be the rural sector, neither can it be the industrial sector as a rate hike for it would raise input costs and render their products uncompetitive. So the dagger has to fall on the hapless domestic consumer. But is this also politically feasible with some form of elections in states always around the corner? Which government can justify high power rates but no electricity?
Policy Updates
New cyber security policy released
Union Communications and IT Minister Kapil Sibal recently released the National Cyber Security policy. The policy aims to facilitate a secure computing environment and enable adequate trust in electronic transactions. The policy document also outlines a roadmap for a comprehensive, collaborative and collective response to deal with the issue of cyber security. consumers interests. The regulator, in a partial modification of directions, asked service providers to implement a uniform procedure for taking explicit consent of the consumer for activation and deactivation.
Number View
$12 billion
What ArcelorMittal was going to invest in its steel plant in Odisha. It scrapped the project after inordinate delays, problems in acquiring land and securing iron ore linkages. A day earlier, South Koreas Posco decided to pull out of its $5.3 billion steel mill project in Karnataka, primarily due to delays in receiving iron ore mining rights and opposition from residents, which held back land acquisition. However, Posco will continue with its $12 billion steel mill project in Odisha.
Rs 59,000 crore
Annual plan size for 2013-14 for Gujarat, which was finalised between Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and Chief Minister Narendra Modi. The plan includes central assistance of Rs 3,979 crore. In addition, Rs 6,000 crore is likely to flow to Gujarat through centrally-sponsored schemes. Thus, overall plan funding from the Centre to Gujarat is expected to be Rs 10,000 crore during 2013-14.
100%
The new foreign direct investment limit in telecom (basic and cellular services), up from the earlier 74%. Up to 49% remains under the automatic route and 49%-100%through the Foreign Investment Promotion Board route.
$60 million
Size of loan for which the Centre has signed an agreement with the Asian Development Bank. The money will be used to improve urban services and strengthening project management in several towns in North Karnataka. The agreement is for the third project under the overall facility of $270 million for the North Karnataka Urban Sector Investment Programme. The loan will be used to develop sewerage networks in six towns, and help the rehabilitation and expansion of potable water systems in two others. More than 100,000 households will benefit.
$8.40/unit
The new natural gas price set by the Union Cabinet, applicable from April 2014, based on the Rangarajan Committees formula. The new price reflects the scarcity value and is in keeping with the ground reality of dearer gas prices, which have a marked regional bias.
22.9%
Increase in visa on arrivals (VoAs) in June 2013 from June 2012. In June 2013, 1,062 VoAs were issued as compared to 864 in June 2012. This scheme was launched in January 2010 to attract more tourists from Finland, Japan, Luxembourg, New Zealand and Singapore. The scheme was extended to citizens of six more countries Cambodia, Indonesia, Vietnam, the Philippines, Laos and Myanmar in January 2011.
Rs 710 crore
Sanctions granted under the Pradhan Mantri Gram Sadak Yojana (PMGSY) at 2013-14 prices to Jammu and Kashmir as a one-time dispensation to cover the cost of land acquisition for compensatory afforestation, forest land, trees, private land and structures for completion of PMGSY programmes. This will expedite completion of these projects.
$255 million
Loan for which an agreement has been signed between India and the World Bank for the National AIDS Control Project IV. The project aims to increase safe behaviour among high-risk groups and contribute to the national goal of reversal of the HIV epidemic by 2017.
Rs 1,030 crore
Approved outlay of the Modified Industrial Infrastructure Upgradation Scheme for the 12th Five Year Plan period. Approved by the Cabinet Committee on Economic Affairs, the outlay sets aside Rs 450 crore for committed liability and the remaining Rs 580 crore for 14 to16 new projects. These include a minimum of two in the North-East for infrastructure upgrades in existing or greenfield industrial clusters.
Rs 1,646.9 crore
Combined value of 16 proposals approved by the Centre on the recommendation of the Foreign Investment Promotion Board in its meeting held on May 10, 2013.
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