India set to raise fuel price, inflation a worry

India is set to raise petrol and diesel prices to keep pace with crude oil’s record run but the move will fuel inflation, heaping more pressure on a government struggling to calm prices ahead of elections.

Crude oil’s surge has hurt consumers around the world and countries such as Indonesia are being forced to raise state-controlled prices. China said on Thursday it would retain controls on fuel prices, denying rumours about deregulation.

"A fuel price hike is inevitable," Indian Petroleum Secretary M.S. Srinivasan told reporters on Friday, adding that the oil ministry was also seeking tax changes to help Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp, which are forced to sell fuel below cost.

India sets the heavily discounted prices at which fuel is sold in order to help fight inflation and protect hundreds of millions of poor people from price shocks.

It partially compensates oil retailers by issuing oil bonds to them, which they can either hold as assets or sell in the market, while upstream companies share some of the burden.

The government, which faces a string of state elections this year and a national poll by May 2009, is worried that higher fuel prices will stoke inflation, already at its highest level in 3-½ years at nearly 8 percent.

It has strived to contain inflation with tough restrictions on exports of rice and duty cuts on some imports, while steel firms have been firmly told to freeze prices for three months.

But with oil above $130 a barrel and losses at state energy firms mounting, the government has little option but to raise retail fuel prices.

"We need to take immediate steps to save oil companies and I have discussed the issue with the prime minister last night," Oil Minister Murli Deora said. Later, though, he suggested that the government may take a week to act.

The cost of the crude oil India imports has doubled since June 2006 but, after a series of retail price revisions, fuel costs less now than it did two years ago. Prices were last raised in February when petrol was increased by 4.6 percent and diesel by 3.3 percent.

TOKEN REVISION "MEANINGLESS"

The chairman of the prime minister’s Economic Advisory Council, C. Rangarajan, said the government faced a big dilemma over raising fuel prices, but analysts said the government would not be able to skirt the issue.

"We expect a higher fuel price revision. A token revision will be meaningless. It’s completely getting out of hand," said Shubhada Rao, chief economist at Yes Bank in Mumbai.

"If you want fuel companies to survive, a certain amount of hike is difficult and unpalatable, but inevitable," she said.

HPCL’s director for finance, Bhaswar Mukherjee, said on Thursday that the company was in talks with bankers to raise its borrowing limit to bridge the gap between soaring input costs and frozen fuel prices.

Economists said oil firms faced liquidity problems as they had to keep paying their suppliers while government compensation in the form of bonds came with a lag.

"This practice of keeping domestic prices suppressed and not allowing the pass-through of global prices is basically becoming unsustainable," said A. Prasanna, an economist at ICICI Securities Primary Dealership.

The prospect of some relief for the state firms, which are suffering a combined revenue loss of 5.5 billion rupees ($128.5 million) a day, helped their battered shares rise on the Bombay Stock Exchange.

IOC was up 3.7 percent, HPCL was up 4.7 percent and BPCL was up 5.1 percent at 0641 GMT, while the benchmark index had risen only 0.35 percent. The refiners’ shares have fallen by a third to a half this year.

Revised inflation tops 8 pct, seen going higher

India’s annual inflation rate remained at 7.8 percent in early May, data showed on Friday, but analysts were more interested in a revision that took the figure above 8 percent in March for the first time in 3-½ years.

The government said it would take more fiscal steps if needed to calm price pressures and an adviser to the prime minister said inflation would ease in the next three to four months, but analysts said an imminent fuel price rise could push it closer to double digits.

Preliminary data for May 10 showed the wholesale price index rose an annual 7.82 percent, close to the previous week’s rise of 7.83 percent and market forecasts.

But the reading for March 15 was revised sharply upwards to 8.02 percent from 6.68 percent, making it the highest inflation rate since September 2004 and fuelling expectations the central bank would take more steps to contain prices. "It just says we are dangerously close to 10 percent," said Shubhada Rao, chief economist at Yes Bank in Mumbai.

Indian inflation figures are frequently revised upwards. But at the end of 2007 revisions were mostly just 0.1 to 0.2 percentage points, in January they had jumped to 0.5 percentage points and in early March data they hit 1.86 percentage points.

The central bank has not raised interest rates in over a year to avoid slowing the economy too rapidly. Instead it has tightened cash conditions to contain surplus inflation-stoking funds in the system, but surging prices, particularly in food and metals, are making its job difficult.

"Do we live with high inflation or see growth prospects jeopardised in the short and medium term?" Rao said.

The 10-year federal bond yield initially edged up on the data before retreating to its pre-data level of 8.02 percent, while the rupee gained to 42.84/85 per dollar from Thursday’s 42.96/97 close.

FUEL PRICES

Policy makers are debating whether to increase retail fuel prices to stem losses at state-run oil companies, which are selling petrol and diesel below market rates.

Oil prices have surged to record highs above $130 a barrel but the government sets heavily discounted retail prices to help fight inflation and protect the poor.

"With a fuel price hike in the offing, inflation is headed up and we may see inflation hit 8.5 percent by June," said A. Prasanna, am economist at ICICI Securities.

"We expect the central bank to take further liquidity tightening measures to control inflation."

The central bank left its key lending rate at 7.75 percent at a rate review in April but raised its cash reserve ratio, the proportion of funds banks must deposit with it, by 25 basis points to 8.25 percent.

That increase takes effect on Saturday, and many economists expect the central bank to tighten again in coming months.

Economists say there is little the central bank can do to tame rising prices, which stem in part from supply constraints and overseas price increases, although traders say it intervened on the currency market this week to stop the rupee from falling too far against the dollar and inflating import prices.

For its part, the government has curbed some exports, cut a series of import duties and put pressure on cement and steel companies to keep prices down.

"Please be patient. We are watching the situation carefully. More steps will be taken as and when needed," Finance Minister Palaniappan Chidambaram told reporters.

C. Rangarajan, chairman of the prime minister’s economic advisory council, said inflation would remain high for another three to four months but good rains in the June-September monsoon season, as well as grain purchases, would help dampen pressures.

"It may reach even 5.5 percent by the end of the fiscal year," Rangarajan said, referring to the year-end in March 2009.

The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is published weekly.

India gold demand low, buyers await falls

Indian gold demand remained weak on Friday due to high prices and on absence of any festivals, dealers said.

"People are now very cautious when they come to buy gold jewellery," said Ashwin Choksi, partner, Jamnadas M. Choksi Jewellers.

Buyers are also waiting to see if the rupee, that had weakened against the dollar, would recover further, helping ease local gold prices, he said.

Most of India’s gold is imported and a weak rupee pushes prices of the metal higher.

Traders are also hoping for good monsoon rains to push up demand for gold, said a dealer with a large private bank.

India’s gold demand may remain sluggish for the next few months and is expected to revive in September, when festivals commence, he said.

Purchases for jewellery and investment fell 50 percent in the first quarter of 2008 in India due to high prices, the World Gold Council has said. India’s jewellery and investment demand stood at 71 tonnes and 31 tonnes, respectively.

Indian shares fall 1.5 pct on inflation worries

Indian shares fell 1.5 percent on Friday to their lowest close in five weeks as inflation worries mounted after a government official said an increase in retail fuel prices was inevitable.

Annual inflation topped 8 percent in March for the first time in 3-½ years, revised data showed on Friday, and analysts said the looming fuel price rise could push it closer to double digits.

"Inflation and crude are key deterrents," said Hitesh Agarwal, head of research at Angel Broking. "If the government raises fuel prices, it adds to inflation. If it does not the fiscal situation deteriorates."

India imports 70 percent of its oil consumption. The cost of the crude oil India imports has doubled since June 2006 but after a series of retail price revisions fuel costs less now than it did two years ago.

Petrochemical giant and refiner Reliance Industries led the decline, losing 2.4 percent to 2,554.80 rupees, its lowest close since May 14.

Tobacco maker ITC dropped 4.2 percent to 213.60 rupees, its worst close in more than three weeks, after its quarterly earnings missed market expectations.

The 30-share BSE index ended down 1.52 percent, or 257.47 points, at 16,649.64 points, its lowest close since April 17, with 25 components in the red. It had been up 0.9 percent in early deals.

The benchmark fell 4.5 percent in the week and is down nearly 18 percent in 2008.

In the broader market, losers overwhelmed gainers 1,925 to 790 on volume of 350 million shares.

Financial stocks were weighed down by concerns the central bank may again tighten monetary policy to rein in inflation.

Top lender State Bank of India fell 2.1 percent to 1,573.25 rupees and rival ICICI Bank fell 1.9 percent to 863.75 rupees.

Top telecoms firm Bharti Airtel, which is in talks with South Africa’s MTN, bucked the trend rising 2.4 percent to 836.30 rupees after smaller rival Idea Cellular sold a minority stake in a unit for $640 million.

Shares in state-run refiners Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp rose between 3.1 and 3.8 percent in anticipation of a fuel price increase.

The refiners have been under pressure because they are forced to sell fuel to retail users at state-set low prices while global oil prices have climbed to record highs.

The 50-share NSE index ended 1.6 percent lower at 4,946.55 points.

Elsewhere in the region, Karachi’s 100-Share index dropped 4.52 percent to 13,011.74 and Colombo’s All-Share index ended 0.51 percent lower at 2,585.78.

STOCKS THAT MOVED

* Explorer Cairn India, a unit of UK’s Cairn Energy, fell 4 percent to 306.45 rupees after several brokerages cut their rating saying the firm was unlikely to announce any large discovery in the next six months and high oil prices would drive up rig demand.

* Idea Cellular ended up 0.14 percent at 107.50 rupees after mobile operator said U.S.-based Providence Equity Partners would a buy a fifth in a unit for $640 million.

TOP 3 BY VOLUME

* Ispat Industries on 35.7 million shares

* IFCI on 16.8 million shares

* Aishwarya Telecom on 11.2 million shares

Indian Rupee Has Fifth Week of Losses on Rising Crude Oil Costs

India’s rupee declined for the fifth week, the worst run in almost two years, as record crude oil costs spurred demand for dollars needed to buy the commodity.

The local currency fell to the lowest since April 2007 this week as companies such as Indian Oil Corp., the nation’s largest refiner, paid more for raw materials. Higher oil costs may slow growth of Asia’s third-largest economy, which depends on imports to meet three-quarters of its annual energy needs.

``The pressure on the rupee continues because refiners are looking to cover dollar needs arising in the short term,’’ said Rohan Lasrado, a foreign-exchange trader at HDFC Bank Ltd. in Mumbai. ``Adding to the rupee’s worries will be the inconsistent dollar supply.’’

The rupee declined 0.5 percent this week to 42.705 versus the dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. It may fall to 43.25 in next few days, Lasrado said.

The rupee is the second-worst performer this year among Asia’s 10 most-traded currencies, excluding the yen.

The local currency will rise by almost 9 percent through the end of the year as the central bank raises borrowing costs by July to fight inflation that’s at the fastest pace in 3 1/2 years, Fortis Bank SA said.

The currency will rebound from its lowest in 13 months as the Reserve Bank of India increases the repurchase rate to 8 percent from 7.75 percent before its next meeting on July 29, Joseph Tan, Fortis Bank’s Singapore-based strategist, said in an interview.

Tightening Policy

``Economic growth is pretty much intact, but inflation is a new threat and there is no scope for the central bank to have a neutral monetary policy approach,’’ Tan said. ``I am leaning toward believing that the central bank will tighten monetary policy further, despite what the economy is going through, and will also use the exchange rate.’’

Fortis predicts the rupee will rise to as high as 39.4 at the end of this year. It is among the 21 respondents in a Bloomberg News survey, all of whom predict that the currency will rise in 2008.

Goldman Sachs Group Inc. revised its forecasts for the Indian rupee, predicting a 3.2 percent drop in the next six months because rising oil costs will increase the import bill and double the nation’s current-account deficit. Goldman wasn’t part of Bloomberg’s survey.

The broad measure of trade that includes investment flows will widen to 3.5 percent of gross domestic product in the fiscal year ending in March from 1.5 percent the previous year, Goldman’s Tushar Poddar and Pranjul Bhandari wrote in a note.

Caught By Surprise

``The recent large move up in the dollar has caught us by surprise and appears to be driven by the run-up in oil prices,’’ wrote Mumbai-based Poddar and Bhandari, analysts at the world’s largest securities firm by market value. ``The rupee will continue to weaken.’’

Goldman changed its three-month, six-month and one-year forecasts for the rupee to 43.9, 44.1 and 42.2 from earlier estimates of 41, 40.3 and 38.9, respectively.

The current-account shortfall widened to $5.4 billion in the three months ended Dec. 31, from $3.7 billion a year earlier and $4.7 billion in the preceding quarter, the central bank said on March 31. That was after the country imported oil worth $71.8 billion in the year through March 31, 23.5 percent more than a year earlier.

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Petroleum ministry wants Rs 10 per litre hike in petrol price

The petroleum ministry has sought a Rs 10 per litre increase in petrol and Rs 5 a litre hike in diesel prices, along with a cut in customs and excise duties, to offset the impact of surge in crude oil prices that have touched $135 per barrel.

"The situation is getting to be alarming. We need to stem the rot at the beginning," petroleum secretary M S Srinivasan told reporters after a stock-taking meeting with the heads of public sector oil companies.

Srinivasan, however, said the Cabinet meeting scheduled for Friday will not consider raising fuel prices as the subject needed some more preparation and a note would be moved to the authorities in a day or two.

"We expect a decision in 3-4 days time," he said, adding that the ministry was suggesting a combination of price hike and duty cut to lower the projected Rs 2,00,000 crore (Rs 2,000 billion) under-realisation on sale of petrol, diesel, LPG and kerosene.

"The price hike is inevitable," he said, but refused to say what quantum of hike the ministry was seeking.

Srinivasan said the ministry was seeking a lowering of customs duty on crude from 5 per cent to zero and import duty on petrol and diesel from 7.5 per cent to 2.5 per cent.

Besides, the ministry was also seeking cut on excise duty on the two products.

Petroleum Minister Murli Deora said he had discussed the situation with the Prime Minister Manmohan Singh on Thursday evening and will raise the issue again on Friday to seek and early meeting of the Cabinet.

"We are trying to see that some action is taken immediately," Deora said