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Fuel inflation accelerates to 8-week high

Fuel inflation accelerates to 8-week high
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First Published: Thu, Jun 30 2011. 03 15 PM IST
Updated: Thu, Jun 30 2011. 03 15 PM IST
New Delhi: Fuel price inflation hit an eight-week high in mid-June, showing price pressures persisted even before the government’s recent increase in diesel prices and suggesting headline inflation in Asia’s third-largest economy is headed towards double-digits again.
While food inflation eased to a six-week low of 7.78% in the week to 18 June, from 9.13% a week earlier, the fuel price increase and its knock-on effects are expected to add to the case for continued tightening of monetary policy.
The fuel price index climbed 12.98% in the week to 18 June, before the fuel price rise took effect, from 12.84% a week earlier, government data showed on Thursday.
New Delhi raised prices of diesel, cooking gas and kerosene last Friday, a politically unpopular move that adds to inflationary pressure, but gives relief to oil companies reeling from revenue losses on state-set fuel prices amid high global crude prices.
“Last week’s fuel prices hike will have first and second round impact on overall inflation, which will start getting reflected in the data next week onwards,” said Aditi Nayar, an economist with ICRA.
Standard Chartered expects the increase in diesel and other fuel prices, which was effective 25 June, to add about 70 basis points to headline inflation.
India’s headline wholesale price index (WPI) inflation stood at an annual 9.06% in May despite continued monetary policy tightening by the central bank, which has increased interest rates 10 times since March 2010.
The Reserve Bank of India is widely expected to raise rates by another 50 basis points in coming months, which could further erode demand in an economy that grew at 7.8% in January-March, its slowest in five quarters.
FUELING INFLATION
Food prices, which are volatile and have been a key driver of inflation in India for nearly two years, are driven heavily by the summer monsoon, which began earlier this month.
“The real outlook on food will emerge only after 10 July. The last 10 days of June and first 10 days of July are a crucial period for the monsoon,” said Sujan Hajra, chief economist at Anand Rathi Financial Services in Mumbai.
“Once we get the data on that, one can take an informed view on the food prices. But as of now, food inflation should remain in single digits,” he said.
Diesel, cooking gas and kerosene comprise 6.4% of the total WPI basket and 70% of the fuel component of the WPI. The primary articles price index was up 11.84%, compared with an annual rise of 12.62% a week earlier.
DEFICIT FINANCE
Investor hopes that the fuel price increase would go towards easing New Delhi’s fiscal burden were dashed by accompanying reductions in duties on oil products that are expected to cost the government about $5.5 billion in lost revenue.
The government is targeting a deficit of 4.6% of GDP in the current fiscal year. Private economists view that target as optimistic as economic growth slows and the government’s subsidy burden persists, and traders expect the federal government to borrow far more than its budget target from the financial markets in the second half of the fiscal year.
Market participants, already skeptical about the government’s ability to hit its fiscal deficit target given its subsidy commitments and a weak share market that has caused it to delay stake sales in state-run companies, are bracing for higher-than-planned government borrowing after September.
Bond prices have fallen in the last four sessions. The 10-year benchmark yield is up 10 basis points since Friday.
“Duty cuts on diesel and petro products will definitely put pressure on the government’s finances. It will be a challenge to meet the fiscal deficit target of 4.6% this year,” Nayar added.
The government plans to borrow a gross Rs 4.17 trillion ($93.3 billion) in 2011/12, of which Rs 2.5 trillion, or 60% of the full-year target, is scheduled to be completed in the first half.
Most market participants believe the government will increase its market borrowing by Rs 30,000-70,000 crore, depending on its fiscal performance. That could be offset in part by 400-500 billion rupees of bond buying by the central bank, dealers have said.
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First Published: Thu, Jun 30 2011. 03 15 PM IST
More Topics: India | Economy | Inflation | Food | Fuel |