Increasing fuel prices would improve the Government of India's fiscal standing and give overseas investors some hope that the country is geeting serious about its woeful finances, especially if diesel prices see some kind of deregulation, says a Reuters report.
Sooner or later, a fuel price hike looks inevitable in India, and that carries both good and bad news for investors, notes the report. However, the trade-off would inevitably come in the form of higher inflation. Standard Chartered, for example, says a fuel price hike would push up WPI in excess of seven percent. What is more, inflation may prove the bigger factor for bond markets, dealers say, after yields have already moved towards December 2011 highs on expectations for a reduced scope of further rate cuts from the RBI, the report pointed out.
Stating that the oil stocks such as Indian Oil and Bharat Petroleum Corp are likely to rally once the move is announced given the obvious impact on profit margins, the report went on to add quoting analysts as saying that as a result, the rupee could gain, tracking broader stocks on such a move.
However, the bigger positive to the rupee would be in the form of a hopeful boost to foreign investor confidence, which has been badly rattled in recent days on policy paralysis in government, added the report.