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May 24, 2012, 11.59 AM IST | Source: CNBC-TV18

Petrol price hike not enough to turn sentiment: Deutsche Eq

Though the government is pulling up measures to support the weak rupee and sliding market, the petrol price hike is little that can boost sentiments. IOC , BPCL and HPCL have hiked petrol price by Rs 6.28 per litre, including sales tax, the hike adds up to Rs 7.50/litre.

Pratik Gupta, Head of Equities, Deutsche Equities

Though the government is implementing measures to support the weak rupee and sliding market, petrol price hike is little that can boost sentiments. 

Pratik Gupta, Head of Equities, Deutsche Equities feels that that the petrol price hike by itself is not enough to turn sentiments. In an interview to CNBC-TV18, he said that investors are cautious due to both global and domestic factors while sharp fall in rupee has hurt sentiment significantly.

According to him, diesel and LPG price hike is on the cards soon. IOC , BPCL and HPCL have hiked petrol price by Rs 6.28 per litre, including sales tax, the hike adds up to Rs 7.50/litre.

Both the Indian currency and market are continuing their losing streak. The rupee, which opened lower on Thursday, quickly hit a new low of 56.28 per dollars.

Gupta, however, is expecting the Sensex to touch 18000 by the year-end. As an investment strategy, he advises to maintain defensive stance on the  market and avoid high beta play. He prefers upstream companies over the OMCs as valuations are attractive.

Also read: HSBC India says good time to enter mkt with long-term view

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Also watch the accompanying videos.

Q: Big news is the petrol price hike. Are you optimistic that diesel will follow?

A: Indeed, we do believe that a couple of tough actions on the part of the government are needed, given what’s happening with the economy and the rupee. We saw the petrol price hike yesterday. It was expected, given that the Parliament got over the day before. What surprises us is obviously the magnitude of the petrol price hike.

Our oil analyst believes that there is still another Rs 1-1.50 left, even in petrol, for the oil marketing companies to breakeven. We understand there is an EGoM meeting this Friday. There are expectations that a diesel price hike and an LPG price hike will follow. These are some of the tough measures that are needed right now, if the government wants the economy and the rupee to start stabilising, start recovering and more importantly to get back the faith of foreign investors.

Right now, at Deutsche, we have been speaking to foreign investors across the world and frankly we have not seen such bearishness on long-term prospects of India. We saw a little bit of this back in December, but that was short-lived. Right now, the sentiment is very bearish. We do need some tough actions such as a diesel price hike.

Q: If we do get ad-hoc hike of Rs 3-4 on diesel, which would still leave almost a Rs 10 gap on under-recoveries, do you think that will be enough to turn sentiment around for global investors or they will not see that as essential reform?

A: In that case, I am afraid it will be seen as a stop gap one off move or a half hearted move. So, I think they need to be bold. So, to that extent, I think they need to be far more aggressive in pushing through hard on cutting the fuel subsidies.

The only thing, which may help the government, is the further decline in international crude oil prices. Brent is already down to about USD 107 per barrel. There is slowing global growth, you are seeing that the inventory pile up prices of natural gas are coming off in the West and tensions in the Middle East political tension seem to be easing to some extent. So that may help Brent prices coming off even further. That may, therefore, alleviate the pressure on the fuel subsidy bill for India.

From the government’s perspective, as of right now, I think they need to go fairly aggressive in terms of the diesel price hike and cut the fuel subsidy bill.

Q: Do you think by itself petrol will change the mood in the market or you need to see a decisive action on diesel for investors to be convinced?

A: I think petrol price hike alone will not change the sentiment. You need to see a lot more. Diesel price hike is one of them. Also, it’s not just the India specific issues, there are also issues surrounding what’s going on in Europe. As we have seen, India is not just the only market which has gone down this year. Infact markets like Brazil have done far worse. India, within Asia, has been the worst performing market this year, especially in dollar terms.

I think you have got to separate out the India specific factors from the international factors. So, on one hand, you have got a risk off environment. We saw the German two-year bonds earlier this week being subscribed for barely 7 basis points of yields. So that’s a sort of bearishness or defensive mindset that global investors have right now.

On the other hand, you have the India specific factors. We need to see a lot more action on the policy making front, efforts to cut the current account deficit, the fiscal deficit. So, therefore, just a petrol price hike alone will not help. We need to see a lot more.

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