Fuel price hike to add 1 pc to inflation:Economists | business | Hindustan Times
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Fuel price hike to add 1 pc to inflation:Economists

The government's decision to increase fuel prices is likely to add a per cent to headline inflation, which is already in double digits, and may prompt the RBI to hike interest rates, say economists.

business Updated: Jun 25, 2010 21:56 IST

The government's decision to increase fuel prices is likely to add a per cent to headline inflation, which is already in double digits, and may prompt the RBI to hike interest rates, say economists.

"We expect inflation to rise by more than a 100 basis points and we will immediately see the result of the direct effect," rating agency Crisil chief economist D K Joshi said.

However, Chief Economic Advisor Kaushik Basu estimated the impact of the fuel price hike on inflation to be around 0.9 per cent, but said it may not reflect in June figure as most of the month has already passed. "I expect an immediate positive impact on inflation. I expect an increase of 0.9 percentage points in the monthly WPI inflation...the impact would largely be felt in the month of July," he said.

Basu, however, said that in the next 6-9 months, the impact of the Government's move would have a soothing impact on inflation due to lower fiscal deficit with the government's subsidy burden coming down.

Citigroup Global Markets oil and gas analyst Saurabh Handa said that while under-recoveries on petrol, which comprise 10 per cent of total losses, would now be wiped out, oil marketing companies would continue to make losses on diesel, LPG and kerosene.

Besides a direct impact, the fuel price hike will also have an indirect impact on inflation, which is, however, difficult to estimate, Basu said. "It will have two type of effect. One-WPI of these products would be revised upwards. Indirect effect- rising transportation cost, input costs. First one would be, of course, a direct one," Joshi said.

Joshi further said that the fuel price hike could prompt RBI to hike policy rates by up to 50 basis points. "If they (RBI) review rates before the policy then it will be 25 basis points before and 25 basis points on the policy day. And if not then it may hike it by 50 basis points," he added.

However, HDFC Bank chief economist Abheek Barua said that the central bank is unlikely to increase rates before the July policy. "RBI is likely to wait till July policy, as there is liquidity crunch in the market," Barua added. He further said that inflation could rise by one per cent due increase in fuel prices.