Petrol prices fuel concern

May 28, 2012, 08:00 IST | Alex K Mathews

Last week was highly volatile for the markets. Markets swung between green and red �the major reason being the drastic fall of the Rupee against the dollar. Investors feel totally lost as they are finding it hard to figure out the market trend.

Uncertainty looming in Europe, especially over Greece, which is going to see a new round of election next month, caused panic among the fellow Euro nations and the rest of the world. The petrol price was hiked by Rs 6.8 excluding state VAT that came as a shocker, but there was no correction in the markets. There was also news that price of LPG, diesel and kerosene will also be increases. But, according to sources, there might be a partial roll back of petrol price hike and the decision to hike other fuel prices would be put on hold, atleast for the time being.

ISSUE: Activists  shout slogans during a protest against the recent petrol price hike in Kolkata. PIC/AFP

During this consolidation phase if Nifty could break the crucial resistance at 4938.79, then it can test 4992 and 5076. However, if it moves below the previous panic bottom, then further slide towards 4717 can be tested. The prominent bullish counters are SBI and L&T. These two stocks can move up further along with ICICI Bank. The Indian Rupee depreciated further and hit a record low of 56.4 against the dollar. However the currency bounced back towards the end of the previous week, but the outlook still remains weak. The RBI maintains its stand that unless it is a domestic factor, which is driving the Rupee down, any step it takes will not bring the necessary result.

Apart from that some believe that the authorities are allowing the currency to depreciate against dollar, in the same way China did in recent past to prop up its current account position. The authorities recently announced that they are planning to offer incentives on exports of labor-intensive items and reward exporters, who diversify into new markets as part of a slew of measures to revive the country’s flailing export sector. Major portion of the Indian imports constitutes crude oil. So, the recent move by the authorities to hike the petrol price is not only to reduce the subsidy given by the government to oil PSUs, but also to make people understand that they need to conserve fuel and use it wisely, thereby reducing the imports.

The rise in petrol price will not have a major impact on inflation, but hike in diesel, LPG and kerosene prices will have a direct impact on inflation and consumer MPC. The intention of the government is to reduce the subsidy burden and use such saved amount for development purpose. In our country, the highly subsidised energy sources are kerosene and LPG and we know that these fuels are made available in black market by certain groups. Hence, it is high time that we realize the need to conserve and use fuel wisely and the government should adopt a more phased approach in reducing the subsidy. A phased approach is good because, we have some good examples in front of us.
On the global front, Greece and the rest of Europe were two main concerns.

As we all know, Greece would see a new round of election next month, which will decide whether the nation would be ruled by left wing conservatives or the right wing parties. From the previous election results, we know that the Syriza party has an overwhelming support from the public, as they have rejected the IMF and Euro majors demand to implement austerity measures. If they don’t implement the austerity measures, then Greece will not get any aid from the IMF or the ECB, which will make them default on the payment and force them to move out of the Euro region or currency. Exit of Greece from Euro currency will have a cascading effect.

Other PIIGS nations like Portugal, Spain, Ireland and Italy might end up in a similar situation. Investors have pulled out money from banks in Greece. Similarly, if depositors in other PIIGS nation start withdrawing their deposits, they will definitely go for safer currency, which is dollar, and so we may see dollar appreciating in the future not only against Euro, but also against other major currencies including the Indian Rupee.

Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended. Feel free to e-mail him at Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

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