Rupee at record low as hopes of fuel price rise grow

Mumbai: The Indian rupee hit a fresh low yesterday as a sharp increase in petrol prices failed to lift sentiment, although expectations grew that New Delhi could take the more politically fraught step of raising diesel prices as soon as today.

India's hefty subsidy bill for diesel, kerosene and liquid petroleum gas (LPG), fuels used in poorer homes, for public transport and for cooking, is a budget-buster that forces heavy government borrowing and weighs on investor sentiment.

High global energy prices and a declining rupee, meanwhile, exacerbate the current account deficit in a country that imports 80 per cent of its oil.

A government committee headed by Finance Minister Pranab Mukherjee will meet today to discuss raising diesel, LPG and kerosene prices, said a Finance Ministry official who declined to be identified.

Oil companies lose about Rs14 (Dh0.93) per litre on diesel, which is much more widely used than petrol, and a weakened government has been unable to push through a price rise or allow full market pricing in the face of political opposition, including from within the ruling coalition.

"Petrol is a low-hanging fruit, as the challenges will come when the government would be deciding on diesel, liquefied petroleum gas, and kerosene, because this is where the subsidies are larger," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "Signal-wise, it is a step in the right direction."

India's three big state oil retailers said late on Wednesday they would raise the price of petrol by about 11.5 per cent.

While petrol is not subsidised and prices are officially deregulated, state oil companies that dominate the market had been under government orders in recent months not to raise prices. "We think the government's ability to implement this price hike could raise market expectations about price hikes in other more critical fuels. While diesel prices in particular would need immediate attention, significant price increases are unlikely, in our view," Goldman Sachs wrote yesterday.

The rupee hit an all-time low of 56.40 to the dollar yesterday, continuing a slide that has seen it lose 13.8 per cent from a February peak as global risk aversion hits India especially hard due to its fiscal and current account deficits and the government's sluggish policymaking, all of which has scared off investors.

The currency recovered some of its losses and was around 56.17 in early afternoon trade. While the Reserve Bank of India has taken administrative measures and sold dollars in recent weeks to defend the rupee, it has refrained from taking bolder steps and appears resigned that more aggressive intervention in the market would be futile.

"Since the US dollar is gaining strength against the major counterparts like euro, we can see rupee weakening further. We expect a 1-3 months range of 54-57 [to the dollar] with overall weakening bias in rupee," Abhishek Goenka, CEO of India Forex Advisors, wrote in a note.