What A Petrol Hike Really Means For You

DSIJ Intelligence / 28 Mar 2012

In this context, we, at DSIJ, made an attempt to find out what impact a Rs 3 hike in petrol would it have on the Wholesale Price Index (WPI).
Most of the key indicators of the Indian economy are moving higher, but the dichotomy here is that the investors wish this to move the other way round. This is to say that while inflation, interest rates, fiscal deficit etc. are heading northwards, investors want the broader indices and the stocks to move in that direction. One of the major concerns that the Indian economy faces today is the rising crude prices. This will widen our deficits and would also fuel inflation, thus affecting the common man.

In the latest street chat is that the petrol and diesel prices are soon going to be hiked by the government. With the rising prices of crude, fuel prices are deemed to be hike in the near future. Due to major events like the Assembly Elections and the Budget, the price rise was kept on hold by the government. According to media reports, the EGOM will soon take a decision on the hike of diesel and cooking gas, while petrol prices can be revised from 31st March and need no approval. However, the actual increase would depend on the government’s nod for the same.

In this context, we, at DSIJ, made an attempt to find out what impact a Rs 3 hike in petrol would it have on the Wholesale Price Index (WPI). 

WPI is broadly divided into three major parts – Primary Articles, Fuel & Power and Manufactured Products which has weighted average of 20.12, 14.91 and 64.97 per cent. Petrol, which comes under Fuel & Power, has a weight of just 1.09% (of the total) in the WPI inflation. If we assume a Rs 3 hike in the petrol prices, than on the MoM, the WPI would increase marginally by 0.03 points. Assuming that all other factors remain constant, the WPI inflation number would increase to 158.43 from 158.40 in Feb 2012. Hence, it appears that for a Rs 3 hike on petrol, the WPI would increase by 0.01%.

However, in an actual scenario, with the rise in price of fuels the transportation cost also increases. The prices of food and vegetables also tend to rise, impacting the common people. Hence, the potential impact of the rise in fuel prices could actually be much higher. Take the instance when petrol prices were increased by Rs 1.80 in Nov 2011, the WPI inflation for the month increased from 157 to 157.4, i.e. by 40 points. This means a rise of 0.25% on a MoM basis. Hence, if the government hikes the petrol price by Rs 3 this time, then the WPI inflation could probably rise by around 0.50% on a MoM basis.

With inflation expected to move higher, the RBI may again take a pause in its next policy meet, which is scheduled for Apr 17, 2012. The economy, which was expected to take a recovery path in the start of CY12, is again in the state of uncertainty, and as of now, there is a lot of confusion as where the economy is headed.

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