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India Infoline Weekly Newsletter - May 25, 2012

Whether UPA II manages to improve its scorecard in the remaining two years of its term is anybody’s guess. Things have not exactly been rosy for the Congress-led regime, and the biggest victim of the policy paralysis has been the rupee.

May 25, 2012 6:49 IST | India Infoline News Service

Petrol prices hiked by ~Rs. 7.50/litre

State-run oil marketing companies have announced a hike in petrol prices by ~Rs 7.54 per litre with effect from Wednesday midnight, according to reports. OMCs reportedly said they will raise petrol price by Rs. 6.28 per litre (excluding local sales tax or VAT). That translates into an increase of Rs. 7.54 per litre in Delhi. The price of petrol in Delhi has gone up from Rs. 65.64 to Rs. 73.18 per litre while in Mumbai the price has been hiked from Rs. 70.66 to Rs. 78.57. In Kolkata, petrol will now cost Rs. 77.88 a litre vs. Rs. 70.03 earlier, while in Chennai, the motor spirit will be retailed at Rs. 77.53 a litre from Rs. 69.55 earlier.

"The decision has been taken. Petrol is a deregulated commodity," Finance Minister Pranab Mukherjee said in a statement. R.S Butola, Chairman of Indian Oil Corp. (IOC), has been quoted as saying that the hike was inevitable since petrol prices had not been revised for the last seven months despite a steady rise in global crude oil prices and a sliding rupee. This is the steepest-ever increase and came a day after Parliament's budget session ended. The highest increase prior to this had been by Rs. 5 per litre. This is the first upward revision in petrol price since November 4, 2011.

Reactions from political parties on petrol price hike:

The Government's decision sparked off a storm of protest and demand for rollback from leaders cutting across party lines, including UPA allies such as Trinamool Congress chief Mamata Banerjee.

West Bengal Chief minister Mamata Banerjee said she felt hurt and let down by the "unilateral" decision to hike petrol prices. She demanded a rollback but said she won't pull out from the UPA Government.

"We are not going to pull out of the UPA and topple the government," she said, adding that it would add to political instability and force new elections.

The Samajwadi Party, which is giving outside support to UPA II, has also demanded an immediate roll back of the petrol price hike. "We demand immediate roll back of petrol price hike. The decision is anti-people," said party chief Mulayam Singh.

Mulayam Singh slammed the Centre saying that the hike is the UPA's gift to the people on its completion of three years in office...Read More

Partial rollback of petrol price hike likely: reports

Looks like political pressure both, from UPA partners and opposition parties, may force the Government to rollback some of the steep increase in petrol prices announced by the public sector oil companies on Wednesday, according to reports. A partial rollback in the petrol price hike is on the cards with the Centre realising that the hike of ~Rs 7.50 per litre was perhaps too steep. In November 2011, petrol prices were raised by Rs. 1.80, but the hike was withdrawn due to political pressure. Petrol prices were last revised on December 1. While the Congress wants the rollback to be in the range of Rs. 3-5, the Government is likely to opt for a reduction of ~Rs 2-2.50 per litre, media reports said. The final decision will be taken after Petroleum Minister Jaipal Reddy returns from Turkmenistan, they added. The Congress party has apparently also distanced itself from the decision to hike petrol prices, saying that it was a unilateral step by the state-run oil marketing companies and that the party was not consulted. The grand old party has reportedly also advised the Government not to go hike diesel prices. According to Congress insiders, the timing of the petrol price hike was wrong as it came just a day after the completion of the Parliament's Budget Session and two days after the UPA completed three years in office.

Congress allies and some of its chief ministers have demanded a rollback. Trinamool Congress and DMK have said they were not consulted on the hike while Kerala Chief Minister Oomen Chandy has written to Prime Minister Dr. Manmohan Singh to reconsider the decision. The Samajwadi Party too has asked for a rollback. "Our support does not mean that we cannot protest. We believe that the government is being unjust, it's one sided and not correct," said Trinamool Congress chief and West Bengal Chief Minister Mamata Banerjee. The NDA has called for a nationwide bandh on May 31. "Petrol price hike is atrocious and unbelievable. The UPA government, on its third anniversary, has given this gift of petrol price hike to the people. And that too Rs. 7.50 per litre. This is unheard of and unimaginable," said BJP leader Prakash Javadekar. The Left parties staged protests against the hike in petrol prices. Tamil Nadu Chief Minister J. Jayalalithaa also demanded an immediate rollback. Meanwhile, Uttarakhand announced a 25% cut in value added tax (VAT) on petrol today. In Kerala, the Oomen Chandy government announced a reduction of 1.63% in VAT on petrol. The Congress party had reportedly asked states ruled by it to cut local taxes on petrol.

No rollback in petrol prices: IOC Chairman

Rupee hits new record low...Recovers on RBI intervention

The Indian rupee recovered from session lows to end slightly higher against the US dollar as the Reserve Bank of India (RBI) intervened to defend the beleaguered domestic currency and exporters sold the greenback. The euro inched up from two-year lows against the dollar on Friday, partly helping the rupee recover. The rupee still closed down for an eight successive week, having hit seven straight record lows since May 16. Its latest was on Thursday when it fell as low as 56.39. This is the rupee's longest losing streak since the 11-week fall that culminated in October 2008. The rupee ended the day at 55.3750 per dollar after being as high as 55.2350 and as low as 56.0850. It opened at 56.00 as against the previous close of 55.6550. Its weekly low was 56.39 while its weekly high was 54.4350. It had closed at 54.39 last Friday.

The RBI is likely to have sold dollars in spot markets via public sector banks to prevent the rupee from falling beyond the psychologically key level of 56 per dollar, according to reports. The RBI is also said to have intervened in the forward markets. Some banks were seen selling off their long dollar positions ahead of the weekend. Some selling from exporters who had missed Thursday's deadline to convert half of their foreign currency holdings into rupees was also cited by traders, according to reports. Besides selling of dollars by some public sector banks and exporters, a rebound in the local stocks and steps taken by the RBI helped the rupee recover from an all-time low on Thursday. The RBI will take the required steps, consistent with its policy, to curb swings in the rupee, RBI Governor D. Subbarao said yesterday. "We have taken action to improve the current flows, encourage inflows and also to curb speculation," Subbarao told reporters in Mussoorie. "We will do whatever is necessary, consistent with our policy."

"The rupee movement is a function of the external situation as well as developments in the current account and capital account of the balance of payments," Subbarao said. "Some structural changes are necessary for an improvement in the current account." Subbarao, who spoke after attending a board meeting of the central bank, said that the RBI was continuously monitoring the exchange rate. India isn’t contemplating selling sovereign bonds abroad, he said. Subbarao said that the central bank won’t rule out the possibility of selling dollars directly to oil refiners. The USD/INR is expected to hover around 56 and 54 in one and three months respectively, with an upside risk, before retreating only modestly to around 52 and 51 in six and 12 months, according to Barclays Capital. Any pullback in USD/INR is likely to be largely dependent on policy initiatives or an improvement in global risk appetite, the UK-based bank says in its report. Barclays expects the RBI to eventually float USD-denominated bonds through public sector banks like the State Bank of India for non-resident Indian investors.

Meanwhile, economists at Goldman Sachs and Bank of America-Merrill Lynch have joined Morgan Stanley in scaling back their GDP growth forecasts for India. Goldman Sachs said it was cutting its GDP forecast to 6.6% from 7.2% for the fiscal year ending in March 2013, citing a weaker investment outlook on the back of domestic policy uncertainties. The Wall Street investment bank also revised higher its wholesale price inflation (WPI) forecast for FY13 to 6.5% from 5%, citing higher food prices and a potential increase in fuel prices. Goldman now expects only 50 basis points in additional rate cuts for calendar year 2012, from its previous forecast of 75 bps. Merrill Lynch also downgraded its GDP view for India, to 6.5% from 6.8% previously for FY13, though it cited the fallout from the eurozone crisis as its main rationale. "We continue to believe that the worst is over, but there is still pain left," Merrill said.

Morgan Stanley earlier this week cut its FY13 growth forecast for India to 6.3%, citing as a key reason the Government's expansionary policy of supporting consumption while investment slows. The euro rose marginally from a 22-month low against the dollar after Italian Prime Minister Mario Monti said that Greece will probably stay in the euro, and Germany can be persuaded to support Europe’s "common good. The 17-nation currency appreciated for the first time in four days against the yen. The gains trimmed declines of ~5% versus the dollar and the yen this month. Sweden’s krona advanced as demand for higher yields boosted stocks. The Dollar Index fell from the most in 20 months. The Dollar Index, which tracks the US currency against six major rivals, declined 0.3% to 82.054, after climbing as high as 82.411, the most since September 2010.

Kaushik Basu terms rupee’s fall a “bit of a bubble”

Capital flows will determine rupee's fate: Gokarn

RBI sets limit on banks' currency F&O positions

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