Share investors are likely to cheer the increase in fuel prices that is expected to improve India's deteriorating finances, partly weighed down by fuel subsidies and demonstrate the government's commitment towards reforms. But this optimism is unlikely to translate into gains for stocks as the much-awaited decision on diesel and cooking gas prices will add to inflationary pressures in the short-term and may prompt the central bank to increase rates further.
"It is a bold move by the government after a long time and investors will like it," said Motilal Oswal, chairman & managing director, Motilal Oswal Financial Services . "While the move is inflationary in short term, the market has more or less discounted it, but a lot will depend on the monetary policy reaction," he said.
On June 16, the Reserve Bank of India raised key rates for the tenth time since March 2010 and is widely expected to tighten the screws further in July.
Focus to be on Europe, Crude Oil
Investors fear more rate increases would be excessive and would delay the economy's ability to bounce back once inflation settles around the central bank's comfort level of 6%. India's wholesale price inflation jumped to 9.06% in May. Fund managers expect inflation to accelerate to over 10% over the next few weeks as higher fuel prices would increase transportation costs of food.
In the longer run, most economists say, the higher price of diesel will encourage more rational use of the fuel and benefit the wider economy. "The increase in diesel and LPG prices may have an effect on inflation in the short term and in turn worry the market, but the move is beneficial for the economy and long-term investors will be happy," said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance.
Brokers said the focus this week will continue to remain on the debt situation in Europe and the direction of crude oil prices. Benchmark Indian share indices - Sensex and Nifty - rose almost 3% on Friday, as foreign investors bought shares worth Rs 890 crore after global crude oil slid, Europe pledged to rescue Greece, and China hinted that it may be nearing the end of monetary tightening.
In the past few months, the perception of a government in disarray has gained ground as it has increasingly given the impression of being unable to deal with a blizzard of scams and agitations by groups claiming to represent civil society.
A widely-followed CEO poll carried out by industry body Ficci and published by ET in its edition dated June 13 reported that a majority of respondents expected little of the Congress-led UPA government. The price hikes may help reshape the impression of haplessness. Late on Friday, the government raised diesel rates by Rs 3, LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre.
In May, the government had increased petrol prices by Rs 5 per litre. The government last increased prices of diesel and cooking gas on June 26 last year, despite global crude strengthening since then. "If all petro product prices are passed on properly, markets will bottom in the next three months and recover significantly thereafter because growth is still there," said Sankaran Naren, chief investment officer, ICICI Prudential Asset Management.
OMCS TO BENEFIT
Shares of oil marketing companies may surge on Monday as the government's decision to increase petroleum product prices will help trim losses that they incur from subsidised sale of oil and cooking gas. Brokers said the step has brought cheer to investors in these companies as they expected a lesser increase in diesel prices and none in kerosene and cooking gas.
Though the three oil marketing companies - Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) - together will still incur revenue losses from fuel subsidies of Rs 121,000 crore this year, the increase in product prices will reduce their monthly borrowings and improve cash flows.
"Shares of oil marketing companies will rise this week not because the petro price increases will bring these companies back into profits, but that there were very little expectations from the government," said the investment head of a mutual fund owned by a public sector bank. "Also, their valuations are almost at rock bottom because these stocks have hardly seen any movement," he said.
Shares of BPCL and IOC have fallen about 4% so far in 2011 against the 10% fall in the Sensex during the period. HPCL shares, which surged 6% on Friday, have been unchanged since January. BPCL and IOC gained almost 3% each on Friday ahead of the meeting of the government representatives to decide on the prices. Oil marketing companies buy crude at international prices, but sell diesel, kerosene and LPG at subsidised prices fixed by the government.
The government compensates them through a mix of cash subsidies and discounts from oil exploration and production companies, including Oil & Natural Gas Corporation (ONGC) and Oil India. Shares of ONGC and Oil India could also rise on Monday as their share of the overall subsidies will drop after the price increases. "Outlook of upstream companies have been clouded by the ad hoc nature of the subsidy-sharing formula. Lack of concrete subsidy-sharing mechanism has resulted in earnings/valuations of upstream companies being contingent upon government directives," said Enam Securities, in a note prior to the rise in prices.
