India Should Not Roll Back Fuel Price Hikes
The Union Government issued Rs 22,000 crores (US$ 4.4 billion) in oil bonds on behalf of the three oil marketing companies at the start of November, largely to compensate them for selling fuel at below production and acquisition costs.
The bonds have a coupon rate of 8.2 per cent and will be redeemable in 2013, so have a 5 year maturity. The bonds do not carry the status of statutory liquidity ratio (SLR), the ratio of assets banks by law must hold in government securities or debt. Which means banks have no legal obligation to hold the debt and may be less inclined to do so, preferring instead to make higher yielding loans to other companies. SLR currently stands at 24 per cent. The bonds are eligible for repo transactions however.
Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation will now be able to use these oil bonds as security with the Reserve Bank of India which will in return give these companies an equivalent number of dollars. The oil companies require dollars to buy crude oil on the international markets for their refineries. The marketing firms spend close to $6 billion or Rs 30,000 core every month buying crude oil.
The proceeds will be split amongst all three marketing firms, with Indian Oil receiving Rs 11,975.51 crore or US$ 2.39 billion, Hindustan Petroleum taking Rs 5,330.76 crore or US$ 1.06 billion and Bharat Petroleum getting Rs 4,693.73 crore or US$ 938 million.
The Indian Parliament in October approved the issuing of oil bonds worth nearly Rs 66,000 crore or US$13.2 billion. The remaining Rs 44,000 crore or US$ 8.8 billion worth of bonds will be issued at a later date.
The oil marketing companies sell fuel at below production costs for which they are partially compensated by the government in the form of oil bonds. The Government of India last financial year issued oil bonds worth around Rs 34,000 crore or US$ 20 billion. In this financial year over Rs 70,000 crore or US$ 14 billion worth of oil bonds are likely to be issued. This amount pales in comparison to the annual import bill of US$ 72 billion or Rs 360,000 crore.
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