India ups petrol prices; little boost for rupee seen

Friday, 25 May 2012 00:00 - - {{hitsCtrl.values.hits}}

Reuters: State oil companies raised the price of petrol with effect from Thursday for the first time in more than six months in a gesture of fiscal discipline that economists said is unlikely to give a significant lift to the embattled rupee.

The rupee tumbled to an all-time low against the dollar on Wednesday as investors continued to fret about yawning current account and fiscal deficits in India, which imports 80 per cent of its oil and heavily subsidises fuel products.

However, since petrol is not subsidised as part of the budget, the benefit of higher prices will mainly go to the country’s big three state refiners.

“Just petrol price hike is no help to the rupee/fiscal deficit. Petrol is not part of the budget at all, so this has zero fiscal impact. This will only help oil marketing companies,” Hitendra Dave, global markets head at HSBC in Mumbai.

Raising or freeing the price of the far more popular diesel, as well as LPG and kerosene, which are heavily subsidised, would have a much bigger impact on inflation as well as New Delhi’s subsidy-burdened finances.

Raising the price of diesel is seen as crucial to improving government finances and bolstering the rupee, but is also politically difficult.

“Let’s see if they hike diesel as well. That I think is the bullet to bite,” Dave said.

Indian Oil Corp (IOC.NS) said it and fellow state oil retailers Hindustan Petroleum Corp Ltd (HPCL.NS) and Bharat Petroleum Corp Ltd (BPCL.NS) would raise petrol prices by 6.28 rupees per litre excluding local taxes from Thursday. Retail prices will be 11.5 per cent higher in New Delhi.

State oil companies together lost roughly $830 million by selling petrol at below market prices since the last price revision in December, said P.K. Goel, head of finance at Indian Oil.

Indranil Pan, chief economist at Kotak Mahindra, said the move would only add about 10 basis points to inflation in India.

“This step is just a flash in the pan and does not change the fiscal figures. So I don’t see any positive impact on rupee from this development,” Pan said.

“Only if diesel, LPG, kerosene prices are increased it will have implications on the fiscal figures,” Pan said.

The move will ease losses incurred by state oil companies, which have been under orders from a politically weakened government not to pass on higher global oil prices in recent months.