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Petrol Price Hike: What's the impact on the common man's life? May 31, 2012
On the eve of UPA government completing 3 years in power in its current term, it gave the country a jolt; The state owned oil marketing companies increased petrol prices by Rs.7.5. Petrol prices went up to INR78.16 to create a historic high on the 23rd of May. While RBI is still battling rising inflation, it now has the tough task of managing inflation in the light of increased petrol prices. This has obviously sent shockwaves to the common man who is trying hard to make ends meet in an inflationary environment.
Author : Debanjan Guha Thakurta


 Petrol Price hike burning a hole in your pocket? Try Liquid funds

Petrol Price Hike: What’s the impact on the common man’s life?

On the eve of UPA government completing 3 years in power in its current term, it gave the country a jolt; The state owned oil marketing companies increased petrol prices by a record Rs.7.5.  Petrol prices went up to INR78.16 to create a historic high on the 23rd of May. While RBI is still battling rising inflation, it now has the tough task of managing inflation in the light of increased petrol prices. This has obviously sent shockwaves to the common man who is trying hard to make ends meet in an inflationary environment.

Is the Indian consumer the only one facing a price rise?


Country and Currency

2007

2012

% increase

India (INR)

48.38

78.57

62.40

USA (US$)

0.87

1.02

17.98

Russia (Rubel)

16.79

25.41

51.34

China (Yuan)

4.94

8.33

68.62

Japan (Yen)

136.7

149.4

9.29

Brazil (Real)

1.54175

1.51468

-1.75

Germany (Euro)

1.394

1.631

17.00

UK (Pound)

1.40197

1.68137

19.92

Table 1: Change in petrol prices in percentage terms of different countries over a 5 year period

As evident from the table above, the price of petrol has risen over the period of five years in different countries. India’s petrol price has grown over by 60% during the past 5 years. If the turmoil in the Middle East continues and the rupee falls unabated, this price rise will continue. For the common man, every rise in petrol prices could sound the death knell for his savings.

How much are we Paying Extra?

Now let’s see how much extra we do have to shell out due to this increase in petrol prices. To measure the impact, I used my own personal example. I use a bike to commute to my office, so the first thing that came across my mind is how much I have to shell out extra for this price hike.


Usage

Liters

Petrol Prices before hike

Petrol Prices after hike

Extra Cost that you have to pay

Consumption per day

1.5

105.99

117.24

11.25

Consumption per Month

45

3179.7

3517.2

337.5

Consumption per year

540

38156.4

42206.4

4050

Table 2: Showing extra amount payable because of price hike

I need 1.5 liters of petrol on a daily basis whether I go to work or for some leisure trips. So I have taken 1.5 liters as the average use.

By looking at the above illustration one can easily start to feel the pinch. On a yearly basis I have to pay INR 4050 more. This amount may seem to be a miniscule amount but it is actually not so.

Have you ever wondered how much do you actually save after paying income tax, wealth tax, service tax, water tax, tax on house property and etc. So this INR 4050 is an additional burden for me that I have to pay.

Inflation: Adding Woes to Misery

Inflation has also surged during the past 8 years.  This fuel price rise coupled with an increased rate of inflation has surely impacted your pockets. Inflation rate has never gone below the 4% mark since January 2006 which remains a major cause of concern.

To read more on Inflation and how it is affecting your investments, click the following link: Inflation Effect: Are You Getting Enough Returns?

But are we ready to face the issues of slowing down of economy, high inflation rates and continuous price rises? I hardly doubt. We Indians know how to save our money but we don’t know how to multiply it, and in today’s uncertain market conditions, only a mere savings from the bank deposits and insurance won’t suffice much.

Common Investment Instruments

Most of us save our hard earned money in safer investment instrument like bank deposits and savings account and buy one-two life insurances and we tend to think that is enough.  But, what we don’t realize is that investing in these instruments won’t help to grow our money.

Savings account is the most common avenue and almost everyone deposits their money in it. But does it really help you to multiply your money? Forget about multiplication it doesn’t even add value to your money. Your savings account offers you 3-4% returns which is less than the inflation rate, which is currently at 7%. So one can easily see that savings account is decreasing the growth rate of money by 3%.

Same thing applies to your bank deposits too. The banks may be offering you lucrative interest rates of  8-8.50%, but when you compare with the inflation rates, you are only getting 1-1.5% more. Separately, you have to pay taxes on the interest income so that reduces your return to quite some extent.

In case of life insurances, people tend to confuse them with investment instruments. Life insurance is something which insures your life against the odds. Stop thinking this to be one of your investment instruments and treat them as a protection measure. Separately, the returns are quite low when compared with returns of other asset classes.

Impact of this Price Hike

Let us quickly glance through what can be the negative consequences for this price rise and how it can affect us.

  • Inflation figure is bound to go up and with it price of goods and services are also expected to go up.
  • Major sector to get affected is transportation, textiles, Auto, FMCG etc, as all of these major sectors requires petrol and other fuels to manufacture and transport them
  • When transportation costs rises, prices of essential commodities also gets increased, which are transported on a daily basis
  • Banking sector is also expected to suffer due to high inflation level. In order to control inflation, the RBI has to implement strict monetary policy that will directly affect the banks.

Word of Advice

It’s high time you do your financial planning and invest in some other asset classes which have the potential to outperform the inflation rate and also keep up with the price rise.

Our expenses increase every year, be it for household purposes, branded goods or tuition fees for children.  Considering the price index data for last several years, a simple fixed return will not be sufficient to supersede the effect of inflation and counter the effect of price rise.

Now let us see how we can minimise the effect of the latest petrol price hike. INR 50000 invested into the savings bank account will fetch me 2000 extra on a yearly basis taking the interest rate as 4%. And if I invest the same amount into any liquid funds, which is currently giving me a return of 9-9.5%, I can get as much as INR 4500 as interest on a yearly basis.

Chart 1: Showing maturity amount of savings bank account and liquid fund

So this extra amount of money will certainly help me out to pay for my fuel expenses. Liquid funds invest into the various money market instruments and can be easily redeemed within a short span of time, which makes them one of the most liquid financial instruments currently available.

 

CAGR

Scheme Name

Latest Date

1 Year

Category: Liquid

 

 

Axis Liquid-Inst(G)

30-May-12

9.6899

Baroda Pioneer Liquid-Reg(G)

30-May-12

9.7144

Birla SL Cash Plus-Ret(G)

30-May-12

9.0617

BNP Paribas Overnight Fund(G)

30-May-12

9.0987

Daiwa Liquid-Reg(G)

30-May-12

9.6239

DSPBR Liquidity-Reg(G)

30-May-12

9.4544

HDFC Cash Mgmt-Savings(G)

30-May-12

9.6201

HDFC Liquid-Ret(G)

30-May-12

9.5427

IDBI Liquid Fund(G)

30-May-12

9.7023

Table 3: Showing returns of select few liquid funds

From our Prime minister to Finance minister, everyone keeps on saying that GDP will grow. I don’t know whether the actual GDP will increase immediately, but for the time being, price of Gas, Diesel and Petrol has increased.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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