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Oil, inflation cooling off...

Oct 31, 2008

Inflation showing signs of cooling down
Amidst the all pervading gloom in the markets, there is something to cheer about on the inflation front. Inflation fell below the 11% mark to 10.68% in the week to October 18 signaling the possibility that the Reserve Bank of India (RBI) might go in for a cut in the key rate going forward. Inflation had reached its 16-year high in August touching 12.91% and was giving the RBI sleepless nights since the figure was way beyond its comfort limits of 5%. While the central bank recently had cut the repo rate to 8% and had slashed the CRR to 6.5% to ease the liquidity crunch, in its monetary policy released last week, the key rates were left unchanged as bringing inflation under control continued to remain the topmost priority of the RBI. Another rationale for keeping the rates unchanged was the fact that the rupee had already depreciated sharply against the dollar. Therefore a further rate cut would have reduced the interest rate differential between India and the US, thereby putting added pressure on the rupee. Whether the RBI will go in for rate cuts remains to be seen. However,it is certainly focused on .bringing down the inflation level to 7% by March 2009.

'Gas' relief for power companies
The international crude oil prices posted their biggest monthly drop (36%) since 1983, on concerns that the decline in the US economy will curb fuel demand in the world's largest energy consuming nation. This also seems to be bringing in some good news for domestic power companies that have been strapped for gas supplies at reasonable prices.

The Indian government is considering a proposal to withdraw import and local levies which, if approved, would reduce the landed price for liquefied natural gas (LNG) significantly. Together with the fact that international crude oil prices, and thereby of LNG, are winding down, the reduced price would make it viable for domestic power companies to buy the fuel from the spot market. While Indian power projects are yet to tie up for long-term gas supplies, they have been buying LNG in the spot market at around US$ 14 per million British thermal units (mbtu), to meet the shortfall. A waiver of levies will reduce the price by US$ 1.7 per mbtu, thus bringing down the variable cost for a power project by Rs 0.7 per unit.

India Inc pinned down by foreign debt
At a time when liquidity is scarce and expensive, having to repay debt can mean severe stress; especially during an economic downturn. Indian companies seem to be poised to face such an unenviable situation in the near future. They have to redeem around US$ 45 bn of overseas debt in the next 14 months. This debt which was borrowed to fund the companies' inorganic growth pursuits, both in the domestic and overseas markets, may not be very easy to redeem given their poor cash flow generating ability and strained working capital in the medium term. The list of companies that have this uphill task due feature nearly 60 large and midsized Indian companies, including some of the largest commercial banks.

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