Equities are likely to open around 2% higher yesterday on perception that the government's decision to hike diesel prices is seen taking the pressure of a likely sovereign ratings downgrade by rating agencies. Also aiding sentiment is the increased risk appetite following the liquidity push announced the US Federal Reserve overnight. Global rating agencies had said India faced the risk of a ratings downgrade if the government did not act to cut the fiscal deficit. The fuel price hike is seen aiding the fiscal consolidation process. US and Asian equities climbed 1-3% after the US Fed announced a third round of quantitative easing, which could potentially release 1.3 trln rupees. Global recovery hopes too got stoked as the Fed raised its US gross domestic product growth estimate for 2013 to 2.5-3.0% from 2.2-2.8% earlier, and for 2014 to 3.0-3.8% from 3.0-3.5% earlier.
Back home, the government's decision to hike diesel prices will boost investor confidence in its ability to work towards the much-awaited reforms, and allay fears of a ratings downgrade of the country. Moody's Investors Services and Fitch Ratings recently warned that India's credit rating may be cut if the government does not control its fiscal deficit. Last Thursday, the government allowed oil marketing companies to raise the price of diesel by 5 rupees per litre and also said that the sale of liquefied petroleum gas cylinders at subsidised rates will be capped at six per family every year. The government did not announce any change in kerosene and petrol prices, but cut the excise duty on petrol by 5.5 rupees a ltr.
Prices of diesel, kerosene, and LPG are regulated by the government, and oil marketing companies are compensated for selling these fuels at subsidised rates. Stocks of Bharat Petroleum Corp, Hindustan Petroleum Corp, and Indian Oil Corp are seen rising 5-7% yesterday on the back of the price hike. On Thursday, their stocks ended up 0.6-2.0%. Even though the hike in diesel price will put upward pressure on inflation, we believe the Reserve Bank of India will now have room to lower interest rates, as it has been stressing that an improvement in India's fiscal consolidation is key for such a move. Last Thursday’s decision is also likely to raise hope that the government may now consider clearing the proposals for opening up multi-brand retail and the aviation sector to foreign direct investment. Yesterday, investors will also eye India's Wholesale Price Index-based inflation for August Friday. The August headline Inflation is likely to be 7.10% versus 6.87% in July and 9.78% a year ago.
STOCK ACTION:
Among specific stocks, Strides Arcolab may rise as the company has received the US Food and Drug Administration's approval for its sterile injectables facility in Poland.
Ranbaxy Laboratories will see some traction, as the company plans to spend $40 mln for setting up a manufacturing unit in Malaysia.
Essar Oil may see some downside on news that the company has been asked by the Supreme Court to pay 52 bln rupees of tax dues to the Gujarat government in eight quarterly tranches. The company had sought a period of four years from the court.
Mawana Sugars may gain on news that the company will sell 49% stake in its arm Siel Industrial for 1.35 bln rupees.
