Will the government hike diesel prices?
Thursday, 24 May 2012
The rupee was trading at 56.10/11 against dollar after hitting a record low of 56.40 earlier in the day.
Heavy dollar selling was seen mostly from foreign banks, which traders suggest is possibly custodian flows, following sharp gains in the domestic stock markets.
While the Reserve Bank of India has taken administrative measures and sold dollars in recent weeks to defend the currency, it has refrained from taking bolder steps and appears resigned that more aggressive intervention in the market could prove futile.
"Since the US dollar is gaining strength against the major counterparts like euro, we can see rupee weakening further. We expect a 1-3 months range of 54-57 with overall weakening bias in rupee," Abhishek Goenka, CEO of India Forex Advisors, wrote in a note on Thursday.
"Currency is well above the comfort level of Reserve Bank of India ( RBI). However, the central bank may not interfere in a big way unless some clarity emerge on the current situation in Greece. As a result, the fall in rupee may be seen even beyond 58 levels." said Nitin Prakash Daga, AVP - Research, Microsec Capital Ltd.
Country's hefty subsidy bill for diesel, kerosene and LPG is a budget-buster that forces heavy government borrowing and weighs on investor sentiment. High global energy prices and a declining rupee, meanwhile, exacerbate the current account deficit in a country that imports 80 per cent of its oil.
Oil companies lose about Rs 14 ($0.25) per litre on diesel, which is much more widely used than petrol, and a weakened government has been unable to push through a price rise or allow full market pricing in the face of political opposition, including from within the ruling coalition.
"Petrol is a low-hanging fruit, as the challenges will come when the government would be deciding on diesel, liquefied petroleum gas, and kerosene, because this is where the subsidies are larger," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "Signal wise, it is a step in the right direction."
A panel of ministers is due to meet on Friday to discuss diesel, LPG and kerosene prices, according to unconfirmed reports, although full deregulation is not expected.
"We think the government's ability to implement this price hike could raise market expectations about price hikes in other more critical fuels. While diesel prices in particular would need immediate attention, significant price increases are unlikely, in our view," Goldman Sachs wrote on Thursday.
Country's three big state oil retailers said late on Wednesday they would raise the price of petrol by about 11.5 percent.
Economists have been downgrading their growth forecasts for Asia's third-largest economy. Standard Chartered now expects India to report annual growth in the March quarter slowed to 6 per cent, from 6.1 per cent in the previous quarter and below earlier expectations of an improvement to 6.5 or 7 per cent.
Heavy dollar selling was seen mostly from foreign banks, which traders suggest is possibly custodian flows, following sharp gains in the domestic stock markets.
While the Reserve Bank of India has taken administrative measures and sold dollars in recent weeks to defend the currency, it has refrained from taking bolder steps and appears resigned that more aggressive intervention in the market could prove futile.
"Since the US dollar is gaining strength against the major counterparts like euro, we can see rupee weakening further. We expect a 1-3 months range of 54-57 with overall weakening bias in rupee," Abhishek Goenka, CEO of India Forex Advisors, wrote in a note on Thursday.
"Currency is well above the comfort level of Reserve Bank of India ( RBI). However, the central bank may not interfere in a big way unless some clarity emerge on the current situation in Greece. As a result, the fall in rupee may be seen even beyond 58 levels." said Nitin Prakash Daga, AVP - Research, Microsec Capital Ltd.
Country's hefty subsidy bill for diesel, kerosene and LPG is a budget-buster that forces heavy government borrowing and weighs on investor sentiment. High global energy prices and a declining rupee, meanwhile, exacerbate the current account deficit in a country that imports 80 per cent of its oil.
Oil companies lose about Rs 14 ($0.25) per litre on diesel, which is much more widely used than petrol, and a weakened government has been unable to push through a price rise or allow full market pricing in the face of political opposition, including from within the ruling coalition.
"Petrol is a low-hanging fruit, as the challenges will come when the government would be deciding on diesel, liquefied petroleum gas, and kerosene, because this is where the subsidies are larger," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "Signal wise, it is a step in the right direction."
A panel of ministers is due to meet on Friday to discuss diesel, LPG and kerosene prices, according to unconfirmed reports, although full deregulation is not expected.
"We think the government's ability to implement this price hike could raise market expectations about price hikes in other more critical fuels. While diesel prices in particular would need immediate attention, significant price increases are unlikely, in our view," Goldman Sachs wrote on Thursday.
Country's three big state oil retailers said late on Wednesday they would raise the price of petrol by about 11.5 percent.
Economists have been downgrading their growth forecasts for Asia's third-largest economy. Standard Chartered now expects India to report annual growth in the March quarter slowed to 6 per cent, from 6.1 per cent in the previous quarter and below earlier expectations of an improvement to 6.5 or 7 per cent.
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