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The government raised railway passenger fares by 14.3% and freight rates by 6.5% on Friday evening after markets closed. The move, which is in line with the warning issued by the Prime Minister a week ago for the nation to brace for tough economic decisions, will send a positive signal to the markets, rating agencies and foreign investors.
While the freight and passenger fare hike will impact only the railways, the action has raised hopes that the government will do what it takes to put the country back on the growth path even if it means alienating the electorate in the short run.
To be fair to the current dispensation, it has only implemented those decisions that the UPA had taken but had kept them in the cold storage.
If the hike seems large, one has to remember that fares were hiked for the first time in 11 years only in January 2013. Also the passenger fare hike was made up of a flat 10% increase in fares and 4.2% increase in FAC, a mechanism devised by the UPA to take into account the fuel costs.
Cement, fertilisers and steel stocks could be under initial pressure because they are the ones to bear the brunt of the freight hike. But southern cement companies, which have not yet fully digested the recent price hikes, could be the ones to be picked up on dips.
A positive fall-out of the government decision would be that the Railways will be able to increase their expenditure on safety, signaling systems, modernise their rolling stock and improve passenger amenities. Railway stocks will do well on Monday and could see action again in the latter part of the week after the initial euphoria wears off.
While a lot of economic data is on tap internationally the only data to be watched with interest is the Flash China HSBC Manufacturing PMI for the month of June. It would help the case of metal stocks and the markets in general if the reading crosses the 50%. The immediate support for the Nifty is at 7487, though a stronger on exists at 7360.
Banking Index lost 0.89% last week. It could continue be under pressure as freight and fare hike will only add to the general inflationary environment.
However, one needs to remember that inflation induced by the rail fare hike will not be significant as compared to the damage that a weak monsoon and surging crude oil prices could cause should the worst scenario plays out. But these are still developing stories and will continue to haunt the markets for some more time.
The markets would be looking forward to know what similar harsh steps the government will be taking to kick-start the economy.
The author is business head – private client group, HDFC Securities
