Summary of RBI-Analyst Conference Call - Dec 18, 2013

Dr. Raghuram Rajan (RRR): Recent readings suggest that headline inflation, both retail and wholesale, have increased mainly, but not exclusively on account of food prices. There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply. RBI has decided to maintain the status quo.

Reserve Bank will be vigilant and will act if expected softening of food inflation does not materialize and it does not translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall.

Gautam Rajesh Kumar, Trust Financial Consultancy: Given the fact that stability in Forex market has returned, CAD has come down, liquidity in the banking system is relatively comfortable, what is the comfort level of inflation for RBI to act on policy rate?

RRR: At this point trying to specify a final target is probably premature, but we do want to see both headline and core inflation come down. So we are also interested in seeing headline inflation which includes the food and fuel component also stabilise and fall.

Srinivasa Varadarajan, Mount Nathan Capital Management: In 1QCY14, it is estimated that about $15 billion of the oil swap will mature and will increase the rupee liquidity in the system. Will the period be used to actually push through the government debt swap at that point in time.

RRR: Actually the net amount is less than $7 billion right now. So that is approximately what will have to be repaid overtime. As and when the time comes, we will take a view as to how that repayment happens and it could be settled through an exchange of rupee funds based on the settlement amount. It could also be, the swaps could be rolled over if necessary and of course if market conditions permit, it can also be repaid. 

Namrata Narkar, IDBI Bank: WPI inflation forecast is being placed largely between 6% and 7% for March 2014. How much of deviation from this forecast is tolerable and if the deviation is above the tolerable level, would the composition of such a deviation then hold significant?

RRR: It depends on not just the WPI, but a whole set of other measures. On the WPI we have been very clear on bringing headline below 5 and core below 3. 

Prasanna, ICICI Securities: You have mentioned the negative output gap as a key factor in helping to contain inflation. Does that mean you do not expect the output gap to narrow in coming quarters and therefore you expect FY15 growth to remain around levels observed in H1FY14?

RRR: My personal sense is that with growth at let us say around 5%, we have somewhere between 1.5%-2% output gap at this point. So with that kind of situation, I think it will take a year or two to get back to potential and therefore we have some room or some time in which the output gap will continue to be negative and exert downward pressure on inflation.

Badri Niwas, Citi Bank: Given you have the experience of July, would you give some guidance to the market on whether the RBI will again use monetary policy tools as a defence for the currency in event of disruption risk that you mentioned manifesting?

RRR: There are some people who argue the disruption this time will be more limited, partly because people have already reacted somewhat over the last 3-4 months. And from India’s perspective, we are in a better position because a) our CAD is much more contained, b) our reserves have grown and we have shown an ability to raise funding if necessary and c) We have lost a fair amount in short maturity bond funds which have the ability to leave more quickly and what remains are the longer term funds. 

Anjali Verma, PhillipCapital: RBI is in favour of removing gold import restrictions. Is it the right time to the remove restrictions and what adverse impact it can have on CAD.

RRR: Gold restrictions are distortion and they are a necessary distortion at this point to restore balance to the CAD. But going forward we would not like this distortion to persist and we would like to remove it.

Ashish Kela, Birla Sun Life Asset Management: Dr. Rajan had highlighted the need to provide real returns to savers. What is the plan on this front? Will this play a role in the monetary policy?

RRR: The question of providing real returns to savers is very much on our minds. We do want to restore savings growth and move towards financial savings by households and I think we have to bring inflation down to make sure that these returns are positive. In the meantime there are stop gap arrangements that are part of a longer term strategy. One example of that is inflation indexed bonds in which real returns are fixed at1.5%.

Rajeev Malik, CLSA: Given widespread macro level demand supply imbalances, what is the efficacy of a blunt instrument such as interest rate in loading CPI core inflation in the supply constrained economy?

RRR: Some of the areas where we had high inflation- pulses and milk- some of that inflation has come down considerably which means there is a supply response that is kicking in and higher prices are a way to activate that supply response. More generally, even in a situation where there are supply constraints of one kind or the other, to the extent that demand exceeds supply, it creates inflationary pressures, some of it is a necessary price adjustment or relative price adjustment, but some of it feeds into more widespread wage inflation. 

Aastha Gudwani, Birla Sun Life: Are we done with the rollback of exceptional measures taken in July, is the cap on LAF here to stay? If yes, then how do you intend to reinstate repo as the permanent operative rate?

RRR: We have ample liquidity and we are largely, with a little bit of volatility, near about the repo rate as being the operational rate. So in that sense I think we have gone back to normal monetary policy at this point.

Weekly Market Commentary - Dec 9 - Dec 13, 2013

As political events have turned very exciting in the country, it is the boring economics that made investors realize that it cannot remain sidelined for long. This week as investors’ sentiment over exit polls reached a climax in the state election results, markets touch their all time high on first trading session of the week. However, as the reality of the day set in, inflation blew out all the air out of the election bubble.

Sensex fell 1.3%; Nifty lost 1.5% while CNX Midcap was down by 2.1% this week.

Monday – Sensex up by 1.6%, Nifty up by 1.7%, Midcap up by 1.0%
Sensex touched a new high as market momentum built up by the exit polls continued. The main opposition and business friendly party BJP win a clear mandate in three out of four state elections strengthening its electoral prospects and chances of forming a government in the centre in May.

Tuesday - Sensex down by 0.3%, Nifty down by 0.5%, Midcap down by 0.5%
Markets saw some profit booking while new draft regulation from CERC led a major blow to NTPC earnings. NTPC went down by 11% as under new guidelines that are going to implement from April 2014, has kept RoE as the method of calculating incentives but has done some tightening on taxation and expenses front making it difficult for players like NTPC and PGCIL to maintain their current profitability.

Wednesday – Sensex down by 0.4%, Nifty down by 0.4%, Midcap down by 0.6%
Markets opened lower as weak global sentiment weighed heavily on domestic trading, but good news on CAD front led indices recoup some of their losses. India managed to lower its current account deficit as exports grew by 5.86% in November while imports dip to their two and a half year low following steep decline in gold imports. India’s CAD now stands at $9.22bn as against $17.2bn previous month.

Thursday – Sensex down by 1.2%, Nifty down by 1.1%, Midcap down by 0.6%
Markets were under selling pressure ahead of release of CPI and IIP numbers. Street estimates IIP numbers are going to signal contraction in the economy while CPI numbers will stick in 10% range prompting RBI governor to raise rates.

Friday – Sensex down by 1.0%, Nifty down by 1.1%, Midcap down by 1.4%
Worse than expected CPI numbers took its toll on the Indian markets when it recorded its biggest weekly fall. CPI for November came at 11.24% vs. street estimates of 10% range raising the fear of increase in interest rates. Street is now estimating a 25bps hike in interest rates on Dec 18. The market has pared all gains made on Monday after state elections results announcement.

Weekly Market Commentary - Dec 2 - Dec 6, 2013

Indian investors are a happy lot this week. Though tapering sword is still hanging over bullish investor sentiments, it seems investors have lot to rejoice over the coming days. Not just exit polls have sounded a victory for their favorite PM candidate, but it has also forced the govt. to increase the pace of their reforms as a last ditch effort to thwart the current anti-incumbency wave in the country. Govt. is back to its disinvestment ways to fill the deficit gap and is likely to make some reform announcements benefitting power and sugar industries.

Sensex gained 1.0%; Nifty gained 1.4% while CNX Midcap was up by 1.1% this week.

Monday – Sensex up by 0.5%, Nifty up by 0.7%, Midcap up by 0.7%
Markets cheered the 2QFY14 GDP growth of 4.8% vs. 4.4% in previous quarter, according to data released by govt. The growth numbers were in-line with street estimates. Also, HSBC PMI index recorded improvement in manufacturing activity for the first time since July. The Index for the manufacturing industry climbed to 51.3 in November from 49.6 in previous month.

Tuesday - Sensex down by 0.2%, Nifty down by 0.3%, Midcap flat
Markets ended up lower as investors resorted to profit booking and cautiousness ahead of Fed’s job report expected at the end of the week. Any improvement in the job recovery may lead to decision in favour of tapering of QE by Federal Reserve. Investors also stayed cautious as India’s capital, New Delhi prepares for polls next day. Even a good announcement from RBI was unable to lift the mood of the market. RBI announced that India’s current account deficit (CAD) narrowed sharply to $5.2bn or 1.2% of GDP in 2Q, from $21bn or 5% last year.

Wednesday – Sensex down by 0.7%, Nifty down by 0.7%, Midcap down by 1.0%
Market sentiments were weak as rise in crude prices added to inflationary concerns. Investors raised concerns that this may lead RBI to raise rates again raising the cost of doing business in the country.

Thursday – Sensex up by 1.2%, Nifty up by 1.3%, Midcap up by 0.8%
Markets went up and regained 21,000 levels as exit polls showed BJP coming to power in at least 4 out of 5 states that had elections recently. BJP is widely viewed as business friendly party among the host of other parties contesting the elections. Any success in state elections will be a testimony of BJP Prime Ministerial candidate Narendra Modi’s popularity and acceptance.

Friday – Sensex up by 0.2%, Nifty up by 0.3%, Midcap up by 0.5%
Exit polls results kept markets up and gave boost to the idea that congress might try to get more reform measures passed in the run up to the main elections in May 2014.

Notes on Indian Gas Policy framework and KG-D6

I have been trying to keep up with developments happening on oil and gas industry front in India for quite some time now. Here, for the benefit of my readers, I am posting copy of my notes on the Indian gas policy and KG-D6 controversy. Although these notes are not comprehensive (I have to work harder), but may give a beginner some headway in the Indian oil and gas industry policy and development space.

 

Brief summary of evolution of Gas Policy in India 

Gas received policymakers’ attention after the discovery of the offshore Bombay High fields by ONGC, from which production began in 1974. 

• By 1984, the government realized the need for a gas distribution network, and set up a separate state-owned company, the Gas Authority of India Limited (GAIL), to develop one.
• In the 1990s, as public sector exploration companies failed to make further gas discoveries, the government auctioned off fields that had been ‘discovered’ but not fully developed by NOCs, to joint ventures between private companies and NOCs under production sharing agreements.
• An upstream regulator, the Directorate General of Hydrocarbons (DGH), was set up in 1993.
• In 1998, the government launched a new regime, the New Exploration Licensing Policy or NELP which was based on PSAs, pitched at greater private and international participation.
• Under the first eight rounds, 234 contracts were signed.
• The ninth round was launched in October 2010. However, bidders have predominantly been domestic private sector companies, and not international companies.
• India also began importing LNG in 2004; it should be noted that, particularly in fertilizers, there was a demand for LNG despite high prices, as prices of the competing input, naphtha were very high.
• In May 2010, the price of ‘administered’ gas was more than doubled from its previously subsidized level; from US$ 1.8 per mmbtu to US$ 4.2 per mmbtu.
• Between 2005 and 2010, APM gas prices remained frozen, with state-owned companies and the Federal government taking on the burden of subsidies. 

 

Gas Pricing Framework

There are three kinds of gas pricing regimes existing in India:

1. Gas prices based on Administered Pricing Mechanism (APM) for those gas reserves before NELP. This was around $2.50/mmbtu and was raised later to $4.2/mmbtu.
2. Import prices paid to LNG imports which depend on international prices which were as high as $16/mmbtu and 
3. Arm’s length price based on market for those gas reserves discovered after NELP. For Krishna Godavari basin the government has fixed gas price at a level of $4.20/mmbtu.

 

KG-D6 Controversy

• The $4.2 price was fixed by Empowered Group of Ministers (EGoM) led by then finance minister Pranab Mukherjee (now President of India) in 2007 and was fixed for 5 years (till Mar 31, 2014).
• RIL’s position is that gas produced from KG-D6 was priced competitively in 2007 but does not reflect the market conditions in 2012. So, RIL is seeking a revision to this price
• Govt invoked the PSC to deny the RIL- BP approvals for 2012-13 budget and recovery of around $1 billion from sale of gas from KG-D6
• PSC Allows govt to conduct audit either through its own representatives or through chartered accountants.
• Petroleum Ministry says approval for budget and work programmes will come after CAG is given the access to records
• RIL maintains that nothing in the PSC permits an audit of operational, commercial and technical decisions of the operator
• The company also maintains that PSC contains no provision that restricts cost recovery through reference to factors like the production level or the extent to which field facilities are utilised.
• RIL attributed the fall in production to the unexpected geology of the area, adding data had established drilling more wells would not have helped.
• RIL says the next stage of its exploration plan for enhancing production is dependent on government approvals. And, it would take four to five years after the approvals for production to rise.
• R S Sharma, former chairman and MD of ONGC (state owned E&P), said it is unfair to withhold approvals, adding RIL does not fall under the purview of CAG. “Decisions in E&P are taken in stages. Characteristics of each block are different, and decisions have to be taken on a case-to-case basis. It is a complex business. It is not like processing, or even the mining industry”.
• Gas output from KG-D6, which peaked to 61.5 mscmd in March 2010 and was set to rise to 80 mscmd by April 2012, has been declining.
• Many believe production is being allowed to fall, as RIL is stuck with a gas price of $4.2 a million British thermal unit till 2014.
• Govt constitutes Rangarajan Committee to resolve gas pricing, profit sharing issues. .
• Rangarajan committee recommends average global prices for domestic gas
• Expected gas price revision is unlikely to benefit Reliance Industries. The clauses in the Cabinet note will not make RIL eligible for any price hike before April 2014.

You can find a compehensive list of all news items that appeared in several newspapers on KG-D6 controversy here.