Fuel price hike may lead to monetary tightening sooner than expected

Higher fuel prices will lead to rise in freight costs that will be passed on to nearly every other category, thus spiralling inflation. This, coupled with the subdued monsoon, may force the RBI to go in for monetary tightening sooner, say experts.

Last week, the empowered group of ministers (EGoM) came up with a number of sweeping changes on fuel deregulation that has increased prices of petrol, diesel, LPG and kerosene between 5% to 33%. However, the increase in fuel prices will lead to higher inflation that would force the Reserve Bank of India (RBI) to go for monetary tightening sooner, said analysts.

Similarly, persistent high inflation would result in faster rate hikes and could impact interest rate sensitive sectors like banks, real estate and automobiles.

"Rise in fuel (prices) will have a spiralling effect and we expect inflation to surpass 12% sooner than later. It is expected that the recent fuel price hike will increase inflation by about 100 basis points (bps). The pace and the quantum of rate hike by the central bank will depend much on how the monsoon pans out. Till 24th June, rainfall was 11% below normal, largely because of the delayed monsoon in the North East and central India," said Kisan Ratilal Choksey Shares and Securities Pvt Ltd, in a note.

Persistent high inflation has been the main worry for the RBI and has heightened the risk of faster rate hikes by the central bank. Macquarie Research said, "We expect an additional 75 bps to 100 bps rise by March-end FY11, but the risk of that coming through earlier is now higher. Adding to this, monsoons are now 11% below normal till date, up from 8% last week."

The RBI is slated to announce its first quarterly monetary policy review on 27th July.

While petrol prices have been completely deregulated, the EGoM announced a more significant reformist move to gradually move towards complete deregulation in diesel prices with an immediate hike of Rs2 per litre. On the other hand, the EGoM also announced hikes in cooking fuel prices like LPG and kerosene by Rs35 per cylinder and Rs3 per litre, respectively, with immediate effect.

Assuming the current oil price of $75 per barrel, the impact of the EGoM decision would lead to reduction of under-recoveries to Rs53,000 crore from Rs77,000 crore. In a research report, Saurabh Handa, oil & gas analyst, Citi India, said he believes that while under-recoveries on petrol, which comprise about 10% of total losses, would now be wiped out, oil-marketing companies would continue to bear losses on diesel, LPG and kerosene. "The impact on public finances would thus depend on how the under-recoveries would be financed. Moreover, while the Kirit Parikh Committee report has sought to address the subsidy formula, as of now there is no clarity on subsidy sharing," he added.

These steps are likely to reduce Indian Oil Corp Ltd's (IOC's) gross under-recoveries by about Rs13,000 crore and those of Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) by about Rs6,500 crore and Rs5,500 crore, respectively. Upstream companies, which share the burden of under-recoveries, will also benefit because the extent of support they are required to provide will now come down. In addition, the price competitiveness of city gas distribution players, which had been constrained by the earlier increase in the administered pricing mechanism (APM) price for gas, will now be partly restored.

Pawan Agrawal, director, CRISIL Ratings, said, "The government's decision will improve the cash flow position of public sector oil companies (PSOCs), and reduce their dependence on borrowings, though only marginally. However, since under-recoveries will remain high even after these steps are initiated, there is a need for creating an institutionalised mechanism to share the burden in a timely manner."

According to comments from oil secretary S Sundareshan, analysts believe that oil-marketing companies would be fully compensated for losses by the government. Against the existing formula of the upstream companies completely sharing losses on auto fuels, marginal to nil losses in auto-fuel sales going forward would mean the new formula would have to accommodate sharing of cooking fuel under-recoveries.

"We expect complete compensation of cooking fuel losses to the OMCs by the government and upstream (companies). While a concrete subsidy-sharing formula is difficult in our view given various moving parts, we understand that the oil and finance ministries would be working together to devise a subsidy-sharing formula, going forward," said Ambit Capital Pvt Ltd.

Over the past few years, under-recoveries have been shared among upstream companies, the government, and PSOCs. While the government has provided cash or oil bonds, the absence of an institutionalised mechanism for meeting PSOCs' under-recoveries has often resulted in delays in support. Due to such delays, the PSOCs have faced volatility in cash flows, necessitating large short-term borrowings.

CRISIL said it believes that either full decontrol, allowing the PSOCs to decide pricing, or an institutional mechanism that compensates the PSOCs for under-recoveries in a timely manner, is critical to restore the financial health and credit quality of the oil-marketing companies.  

While saying that commenting on the sharing ratio would be speculative, Ambit Capital said it believes that implementation of subsidy-sharing on the lines of the one proposed by the Parikh committee report is a high possibility. However, given the fact that cooking fuel prices were not increased in the same proportion as proposed by the committee report, Ambit said that changes will have to be made to crude price ranges and rate of tax.

Given that India would continue to remain an oversupplied market, at least for transportation fuels, independent refiners would find the price negotiation difficult to handle. ICICI Securities Ltd, in a research note said, given that motor spirit (MS) and high-speed diesel (HSD) prices have been deregulated or would be deregulated soon, independent refiners would have to negotiate with OMCs for off-take of MS and HSD. Earlier they were able to sell at trade parity prices. This would imply that the independent refiners would be hard pushed by OMCs and there might be a few mergers of these refiners with parent companies in order to benefit from the latter's marketing network, the ICICI Securities report said.

Post deregulation, many analysts believe that private players would be able to challenge the near-monopoly of PSOCs. Market-driven pricing of auto fuel would also mean entry of private players such as Reliance Industries Ltd (RIL), Essar Oil and Shell, thereby intensifying competition in an otherwise State-run monopoly. "Even if history doesn't repeat itself but merely rhymes, State-run auto-fuel market share erosion by 5% to 10% seems likely," said Ambit Capital.

Given that RIL, Essar Oil and other private players would be able to expand their retail coverage post deregulation, OMCs' market share will be affected. The ICICI Securities report said, "HPCL and IOC, which have maximum coverage on highways will be affected the most, while BPCL will be impacted the least as most of its outlets are within cities. Moreover, BPCL's impressive E&P portfolio would offer further upside and we believe long-term investors are better off investing in BPCL at present." 

Talking about the negative impact of fuel price deregulation on sectors, Macquarie Research said that for the cement sector, freight accounts for 15% of the costs and given the oversupply in the cement market, chances of this cost being passed on to customers are bleak. "We maintain our 'underweight' call on the sector with key underperforms being India Cement and UltraTech," it added.


Small Cars,Big Discounts

The big discount—of over Rs30,000 on the Maruti Suzuki Ritz diesel—says it all; there is a price war on again in this segment and stocks are building up. Despite a reported three-four month waiting period for the VW Polo and the perceived delay in deliveries on the Ford Figo, as well as reports of record incremental sales over the past few months, an oversupply situation seems to be hitting the new car market that is not reflected in dry numbers.
One reason proffered for this is that shipments to the disturbed areas in the North East are being re-routed to other parts of the country. Another reason given is that there has always been a mismatch between factory despatch, dealer/distributor lift-off and vehicle registration figures—and most manufacturers provide numbers on the basis of vehicles which have left the factory gates, not based on actual registration data. And, finally, while there is undoubtedly a boom in new vehicle purchases, there is also a situation of oversupply and overcapacity.
So if you are out in the market to buy a new car, it is that time again—shop around; don’t get taken in by smooth-talking salesmen trying to push premiums on supposed short-supplies; certainly do not get locked in by making advance payments and waiting for them to call back. Most waiting lists, barring a few specific exceptions like the Maruti Swift diesel and VW Polo diesel, are over-hyped. Or, as in the case of the costlier SUVs and sedans, the delay is because of the need to place specific orders. But that’s another segment altogether.

A Swift Move

While on the Maruti Suzuki Swift, expect a face-lifted version very soon in India, probably before the festival season. A changed rear-end appears to make for a bigger boot, though it is the size of the opening that gives that illusion, since it doesn’t really appear to be bigger. The front-end has been worked on a wee bit, too, but it is the interiors which are reported to be the area where the maximum work on catching up with the rivals has been done.

That’s good to hear, since interiors seem to be the tipping point in influencing purchase decisions for many customers, now that the engine and other technologies appear to be nearly similar in all brands. And interiors is where Maruti Suzuki has traditionally been the weakest, since it started out as a seller of cars to the masses, but the mass market meanwhile has moved into wanting something more and better.

Shocking Changes

This brings us to the business of after-sales fitments. There seems to be no dearth of potential add-ons of all sorts that can be positioned inside and outside a new vehicle. Passion as well as money fuels the most amazing budgets which are then used to improve cars. But please do get the opinion and guidance of a decent electrical engineer, one who is not going to be impacted by the loss of a possible sale, before overloading the electrical circuits of your car. Something as ostensibly simple as higher-rated bulbs can cause fire; and the temptation to bypass the fuses and safety circuits, or to add all sorts of capacitors and add-on circuits, can have terrible results.

One way to test this is to remove the fusible link, or even all the fuses—if anything works despite this, it has been hooked on to the electricals incorrectly. As for overloads because of this, the first you will come to know about it is when that wisp of smoke curls out from under the dashboard or bonnet, or anywhere else. Storing a small fire-extinguisher as well as a can of pepper spray in your car would also make a lot of sense. Both have their specific uses, are eminently legal and don’t cost too much.

Veeresh Malik started life as a seafarer, and in the course of a work life, founded and sold Pacific Shipping and Infonox Software, to return to his first love—writing


A self-goal

Why is FIFA not using technology for close decisions like what’s being done in tennis, cricket and snooker?

Read Article...


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)