Bangalore: The Central Government indirectly helped to keep rupee realisations relatively high for the export community not just by enabling RBI sterilise dollar inflows through issue of special securities, but also paying higher subsidy to the oil sector.
The RBI’s currency intervention has adversely impacted the oil marketing companies which had to pay a higher price for the refined petroleum products as the crude prices, in rupee terms, had become more expensive than what would have been the case had there been no such intervention. A rupee appreciation would have partially offset the high international oil prices.
Dr Abheek Barua, Chief Economist at the HDFC Bank said, “Actually there is a transfer of subsidies from the oil sector to the export sector.”
The effort to hold the exchange rate, translated into higher issue of oil bonds to compensate for under recoveries in petroleum products sold to consumers. Outstanding oil bonds this year amounted to about Rs 62,000 crore. Interest liability on oil bonds this year is estimated at Rs 3,853 crore and for the next year it is estimated to rise by another 43 per cent.
Hidden subsidy
It may be recalled that the Finance Minister, P Chidambaram spoke of a hidden subsidy to the exporter community in the interest payments on the Market Stabilisation Scheme (MSS) bonds that the Government issued from time to time. This was done to facilitate RBI buy up the increased dollar inflows without causing an increase in the money supply in the economy that such intervention would otherwise have created.
According to the RBI data, outstanding MSS securities amounted to Rs 1.76 lakh crore. MSS securities included 91-day, 182-day, 364-day Treasury Bills and dated securities.
Interest costs
MSS securities are not treated as part of the Government’s borrowings. Interest payments on MSS though are serviced from the revenue receipts. Interest payments on MSS securities amounted to Rs 8,351.34 crore, almost 2.3 times the budgeted estimates for the current year. For the next year, the interest servicing on outstanding MSS securities is estimated at Rs 13,958.14 crore or a 67 per cent increase. In 2006-07, interest on MSS was only Rs 2,658 crore.
Says Dr Barua, “The interest costs are nothing but de facto export subsidies.” The Finance Minister admitted as much in the Budget speech.
During this financial year, the interventions helped contain the rupee’s appreciation to only about 12 per cent against the dollar. Issuance of dated securities under the MSS, according to the revised estimates for 2007-08, was Rs 1.45 lakh crore against the budget estimates of Rs 22,000 crore.
At least two of these securities issued had coupons of 11.30 and 12.25 per cent for amounts of Rs 25,000 crore and Rs 7,000 crore each, respectively. Both these securities mature in 2010.
The RBI’s currency intervention has adversely impacted the oil marketing companies which had to pay a higher price for the refined petroleum products as the crude prices, in rupee terms, had become more expensive than what would have been the case had there been no such intervention. A rupee appreciation would have partially offset the high international oil prices.
Dr Abheek Barua, Chief Economist at the HDFC Bank said, “Actually there is a transfer of subsidies from the oil sector to the export sector.”
The effort to hold the exchange rate, translated into higher issue of oil bonds to compensate for under recoveries in petroleum products sold to consumers. Outstanding oil bonds this year amounted to about Rs 62,000 crore. Interest liability on oil bonds this year is estimated at Rs 3,853 crore and for the next year it is estimated to rise by another 43 per cent.
Hidden subsidy
It may be recalled that the Finance Minister, P Chidambaram spoke of a hidden subsidy to the exporter community in the interest payments on the Market Stabilisation Scheme (MSS) bonds that the Government issued from time to time. This was done to facilitate RBI buy up the increased dollar inflows without causing an increase in the money supply in the economy that such intervention would otherwise have created.
According to the RBI data, outstanding MSS securities amounted to Rs 1.76 lakh crore. MSS securities included 91-day, 182-day, 364-day Treasury Bills and dated securities.
Interest costs
MSS securities are not treated as part of the Government’s borrowings. Interest payments on MSS though are serviced from the revenue receipts. Interest payments on MSS securities amounted to Rs 8,351.34 crore, almost 2.3 times the budgeted estimates for the current year. For the next year, the interest servicing on outstanding MSS securities is estimated at Rs 13,958.14 crore or a 67 per cent increase. In 2006-07, interest on MSS was only Rs 2,658 crore.
Says Dr Barua, “The interest costs are nothing but de facto export subsidies.” The Finance Minister admitted as much in the Budget speech.
During this financial year, the interventions helped contain the rupee’s appreciation to only about 12 per cent against the dollar. Issuance of dated securities under the MSS, according to the revised estimates for 2007-08, was Rs 1.45 lakh crore against the budget estimates of Rs 22,000 crore.
At least two of these securities issued had coupons of 11.30 and 12.25 per cent for amounts of Rs 25,000 crore and Rs 7,000 crore each, respectively. Both these securities mature in 2010.
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