Fuel price hike nudges up June inflation to 10.55% from 10.16%

Fuel price hike nudges up June inflation to 10.55% from 10.16%

New Delhi: India’s benchmark inflation continued its upward spree in June on the back of the fuel price hike, raising expectations the central bank will further tighten its monetary policy at its review later this month.

Provisional data for June show the Wholesale Price Index (WPI) rose to 10.55% from 10.16% in May. A Reuters poll of economists had forecast inflation at 10.8%.

While food inflation declined, prices of manufactured items rose marginally. Fuel price inflation rose to 14.32% from 13.05% in May.

The government, in late June, increased prices of fuel items as part of its deregulation strategy to reduce under-recoveries for oil marketing companies and cut oil subsidies. Petrol prices went up by Rs3.50 per litre, diesel by Rs2 per litre, kerosene by Rs3 per litre and liquefied petroleum gas (LPG) by Rs35 per cylinder.

Finance minister Pranab Mukherjee said on Wednesday headline inflation would moderate after the summer harvest. “After the kharif (summer crop) season is over, that will have a moderating influence. It is already being felt on food items...It will further moderate WPI (inflation)."

Planning Commission deputy chairman Montek Singh Ahluwalia said though the fuel price hike would further push up inflation in July, WPI would fall below double digits by the end of December. “I think although there will be an adjustment upward (in inflation) when fuel price hike gets fed in July numbers... I don’t alter my conclusion that at the end of the year it will be low," Ahluwalia said.

Samiran Chakraborty, regional head of research at Standard Chartered Bank, said inflation remains a concern in the near term. “However, as the base effect wears off, inflation will come down below 10% in around three months following a hump-shaped trajectory."

Inflation for April has been sharply revised upward from 9.59% to 11.23%, government data show. Non-food manufactured goods inflation, a proxy for core inflation, rose to 7.4% in June from 6.7% in May.

“This was one of the main concerns for RBI (Reserve Bank of India) to opt for an intermittent policy rate hike of 25 bps (basis points) on 2 July. Indeed, the RBI noted in its accompanying statement that inflation is now very much generalized and that demand side pressures are evident," Taimur Baig and Kaushik Das of Deutsche Bank AG wrote in a research note. One basis point is one-hundredth of a percentage point.

RBI is to review its monetary policy on 27 July.

Anecdotal evidence points to capacity constraints in some industries, which may put more pressure on inflation, he added. Industrial production, though it slowed in May, remains robust, which may give RBI the leeway to raise its policy rates. India’s Index of Industrial Production (IIP) grew at 11.5% in May, its eighth straight double-digit rise.

On Tuesday, Ahluwalia had said monetary policy is not a constraint on growth.

Citi India, in a macro report, said it expects a rate hike on 27 July.

Reuters and PTI contributed to this story.