Skip to main content

Fuel price, Inflation, Savings

It's time to visit your portfolio and weed out investments whose inflation-adjusted returns is low or negative


On June 4, the central government announced a price hike of Rs 6 per litre of petrol, Rs 3 on diesel and Rs 50 per LPG cylinder, together with customs and excise duty cuts in an attempt to save the oil marketing companies from bankruptcy. Oil marketing companies buy crude oil from the international markets and distribute it in India. India imports 73 percent of its petroleum needs as the production of crude oil here is very little.


The price of crude oil in the international markets has nearly doubled from a low of $60 per barrel in May 2007 to $130 a barrel in May 2008. The retail price of crude in India, administered by the government, has not been raised since 2004. Hence, these oil marketing companies have been running a very unprofitable business of buying crude at high prices and selling it to domestic consumers at low prices. In this process, they have accumulated mind-boggling losses of Rs 2,000 billion and were facing a severe liquidity crunch.


These firms were losing Rs 21.43 on the sale of every litre of petrol, Rs 31.58 per litre on diesel Rs 35.98 per litre on kerosene while losses on LPG were Rs 353 per 14.2-kg cylinder. Oil marketing companies therefore lost money every time they made a sale due to their inability to peg their selling prices to the purchase price of crude. To defuse this crisis, the government raised fuel prices by an average of 13 percent with full knowledge of its impact on inflation.


Impact on inflation


The current annual wholesale inflation is already high at 8.1 percent. The government expects the effect of price hike on inflation to be marginal at around 60 basis points. Others, however, are not so positive about the impact of the price hike. Crisil, the rating agency, felt that it would push up inflation by 95 basis points taking into account both direct and indirect impacts. Out of this, the direct impact will be 51 basis points with the highest contribution coming from the hike in the LPG price. The indirect impact, which will be felt over the course of the next few months, will be 44 basis points.


Economists are of the opinion that inflation will flare up to a 15-year high of 14 percent due to the price increase. A rate of nine percent would be the highest inflation since 1995.


A high inflation rate affects the consumer at the retail level and the corporate profits too. The cost of living rises and the consumer has to pay more for the same goods and services. At the corporate level, the higher cost directly impacts the bottom line. Their inability to pass on the price increases to the consumer further squeezes their margins. This in turn directly affects the stock markets, which prices future earnings of all companies listed with it. The fuel price hike caused the Sensex to lose nearly 400 points on Wednesday, June 4. Investors' reaction reflected the anxiety about the likely impact of the fuel price hike, which was more than what the market expected.


Now, all eyes will be on the Reserve Bank of India (RBI) as inflation is now beyond its comfort zone. Whether the RBI will raise the cash reserve ratio (CRR) or even raise interest rates is now a matter of conjecture. But economists feel since price pressures are largely beyond its control, and the RBI will maintain a measured response to fight inflation by managing CRR in the banking system rather than raising interest rates, which could impact growth.


Impact on savings


Inflation not only increases the prices of all food grains and services but also impacts your retirement corpus. It increases the amount you have to save up. For example, if you feel Rs 10 lakhs is a good amount retire with at the age of 60 and inflation is at five percent, you will have to save up Rs.33.86 lakhs to afford the same cost of living 25 years hence. The farther away you are from retirement the more you have to save to maintain the same earning power. These calculations are at an inflation rate of five percent and a higher inflation only pushes the quantum further up.


Hence, it makes immense sense to revisit your portfolio and weed out those investments whose inflation adjusted returns are very low or even negative. Exploring investment avenues that would protect your capital from being eroded by inflation is a must in these uncertain times.

Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now