Expected fuel price rise adds to inflationary pressure

Expected fuel price rise adds to inflationary pressure

Mumbai: Moves by oil firms to raise petrol prices and the possibility that diesel will increase too make the central bank’s fight against inflation more difficult and piles more pressure onto a beleaguered government.

Indian Oil Corp , Bharat Petroleum and Hindustan Petroleum will raise petrol prices by about 5.6% this week due to surging global crude prices. Shares in the companies rose early on Wednesday.

The Reserve Bank of India meets this week to review its monetary policy in the light of still high inflation.

While it is widely expected to refrain from raising rates after six increases since March, rising energy and other commodity prices make its target of cutting headline inflation to about 5.5% by the end of March harder to achieve.

Economists said raising gasoline prices would have a small impact on the wholesale price index (WPI), India’s main measure of inflation, but lifting diesel prices would be more significant because that would impact costs for road transport, farmers and manufacturers.

The government is expected to make a decision on state-set diesel prices next week, with a 2 per litre increase foreseen by industry sources.

“The impact of the petrol price hike is limited because of its low weightage in the WPI but if the rumoured 2/litre diesel price hike also takes place, then the direct impact could be about 35-40 basis points," said Samiran Chakraborty, head of India research at Standard Chartered Bank.

Wholesale price inflation fell to 7.48% in November, its lowest in a year, data showed on Tuesday.

But the fuel price increase put the spotlight back on inflation in India’s financial markets on Wednesday. Federal bond yields and swap rates nudged higher, taking their cue from a drop in US Treasury prices and the prospect of higher fuel prices.

At 11:45am, the most traded 8.13%, 2022 bond yield was up 1 basis point.

A Reuters poll conducted late on Tuesday showed just one in 23 analysts expect the Reserve Bank of India (RBI) to raise rates this week, while 14 of 22 see at least a 25 basis point rate increase by the end of the fiscal year in March.

“If RBI pauses tomorrow then they will have to take more aggressive actions in the future, especially post the fuel price hike," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai, who was the lone economist in the poll to predict a rate increase this week.

“Inflation is looking good of late only because of the statistical base effect," she said.


The price rise would be the steepest since June when India freed up petrol prices from government control. The decision, which came along with a rise in prices of diesel and cooking fuels, sparked political and street protests against the Congress-led coalition government.

Prime Minister Manmohan Singh’s government is under attack from the opposition for a slew of corruption scandals, and raising fuel prices in a country where hundreds of millions live in poverty could anger the governing party’s core voter base.

“Parliament session is over and headline inflation is trending down and with crude still manageable at $90, I think the government thought it fit to hike petrol prices now. Won’t be surprised if diesel prices are also hiked," said a finance ministry source who deals directly with energy and fiscal policy.

“These decisions are as much economic as they are about political management," the person said.

The Hindu nationalist opposition party, the Bharatiya Janata Party, demanded a rollback of the petrol price increase, calling it “totally unwarranted and unjustified," Press Trust of India reported, quoting party spokesman Prakash Javadekar.

A spokesman for state-run BPCL said his firm would raise petrol prices by 2.95 (7 cents) a litre from Wednesday while sources at IOC and HPCL said their firms would raise prices by 2.96 a litre from Thursday.

Shares in the three were up by between 3 and 5% as of 12:50pm, outperforming a modest decline in the broader market .