The hike in petrol prices by a steep Rs 7.54 a litre will have only a marginal impact on inflation but the move suggests that going forward the government could implement measures like this to stem the "de-rating" of the India story, Citigroup said in a report.
State-owned oil companies on Wednesday hiked petrol prices by a record Rs 7.54 per litre as rupee continued a free fall against the US dollar. This is the third one in a year and the steepest hike in petrol price ever.
According to the Citi India Macro report, "given growing worries on the prevailing 'governance deficit', we think this move is positive from a sentiment point of view, and suggests that the government could implement measures to stem the de-rating of the India story."
The hike, the third in one year, came a day after the end of the Budget session of Parliament and Prime Minister Manmohan Singh speaking of the need to take "difficult decisions" on the third anniversary of UPA-II.
Given that petrol has a small weight in the WPI the price increase would have only a marginal impact on inflation.
"We estimate the direct impact to be around 12 bps on headline WPI," Citigroup said.
The retail inflation (Consumer Price Index) for April was 10.36%, up from 9.38% a month ago. The inflation based on movement in wholesale prices -- WPI --moved up to 7.23% from 6.89% in March.
Meanwhile, however, the subsidy bill is likely to remain unchanged as losses on petrol are not included in oil under-recoveries as it is officially de-regulated. However, it could bring down full year losses incurred by oil companies.
The full year losses incurred by oil companies on petrol is estimated at around Rs 110 billion.
An EGoM (Empowered Group of Ministers Meeting) is scheduled for Friday and it will be keenly watched if the government raises (even marginally) the prices of the politically sensitive regulated fuels like -- diesel, LPG and kerosene.
Prices of the regulated fuels ? diesel, LPG and kerosene ? have been unchanged since June, 2011.
The report further noted that India needs strong capital flows and aggressive policy measures to prevent a growth downturn.
India should particularly focus on measures to meet the two percent subsidy cap, execution of fuel supply agreements, steps to improve coal/gas availability, measures to attract capital inflows.
State-owned oil firms, which had in the fiscal ending March 31, 2012 lost Rs 4,860 crore on petrol sales, were currently losing Rs 6.28 per litre on petrol.
The three state-run firms -- Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum -- had together lost Rs 138,541 crore in revenue in 2011-12. This year they are projected to lose a record Rs 193,880 crore.