Just last week the Reserve Bank Of India RBI raised interest rates for the thirteenth time in a row. However, the past two rate hikes including the latest one, a cumulative 0.5% has yet not been passed on to customers. Banks now prefer to absorb the costs themselves rather than risk losing scarce business. Thus, maybe it's time for the RBI to stop its monetary tightening. But, inflation is still in double digits with the latest food inflation number (October 27, 2011) above 11.4%. Either way the central bank and the finance ministry believe that inflation will start moderating soon.
With this hope in mind, the Petroleum Ministry is pushing for yet another hike in diesel and domestic LPG prices. As this is a politically sensitive issue, there is still some time before assembly elections kick off in various states. So is now the right time for yet another rate hike? An empowered group of ministers will debate on this issue at the end of this month.
Well, oil marketing companies (OMCs) including Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are bleeding losses. These three state run entities are losing Rs 3.2 bn daily on the subsidised sale of diesel, kerosene and domestic LPG. They are currently losing Rs 8.6/litre on diesel and Rs 260.5 per LPG cylinder. They also lose Rs 25.7/litre on kerosene. At the current selling rate, the industry is projected to lose Rs 1.3 trillion in revenue on the sale of these fuels for the year. These companies have already reported losses at the net level for the first half of the financial year 2011-12.
The regulated rates at which these fuels are currently sold are well below market-linked prices. Their losses are covered by buying fuel at discounted rates from Oil & Natural Gas Corporation (ONGC) and Oil India. Plus, they also get cash compensation from the government. Since the cash from the government comes with a delay, these OMCs are forced to borrow heavily from banks to fund their working capital requirements. Since their combined borrow rupee depreciation , which has weakened by nearly 10% against the dollar.
While inflation is supposed to moderate from November onwards, increased prices of diesel and LPG may in turn stoke inflation further. The government has some tough questions to answer. Should it raise prices and risk higher inflation? Or should it remain status quo, and have the OMCs bleed more and more losses and its budget deficit to fall even more out of whack? In this situation it is next to impossible for the government to keep everyone happy.