High petrol prices push inflation to 10.55%

Spurred by an increase in oil prices, the overall inflation continued its double-digit run for the fourth straight month in a row at 10.55 per cent in June, mounting pressure on Reserve Bank of India to raise key interest rates in its July policy review.

The wholesale price-based inflation, which was above 11 per cent in March and April, inched up by 0.39 percentage points in June.

It was in the negative at 1.01 per cent in June 2009, government data showed. Finance Minister Pranab Mukherjee, however, exuded confidence that inflation would fall to 5-6 per cent by the year-end with the advent of kharif crop in the market.

"It (Inflation) is hovering around double digit. After Kharif season is over there will be a moderating impact which is already being felt," he said.

To combat inflation, the RBI had raised policy rates thrice this year and experts peg another 25 basis points hike in its scheduled monetary policy review on July 27.

"July figures would be slightly higher. The RBI may raise policy rates by another 25 basis points. Post July, we could see some dip in inflation as the base effect starts waning," Prime Minister's Economic Advisory Council member Govinda Rao said.

The double digit inflation in June could be partly attributed to low base in the year-ago period when the inflation was in the negative, which means even a small increase would seem large.

Finance Secretary Ashok Chawla said, "Inflation is almost as it was. This kind of minor ups and downs is something on which one cannot comment."

Economists expect prices to cool from August as the base effect impact starts fading.

"Food prices are gradually softening. July figures will be high as the full impact of fuel price hike would be passed through," Rao said.

The government on June 25 had hiked petrol prices by Rs 3.5 a litre while deregulating its pricing, and diesel by Rs 2 a litre.

Besides, it raised prices of cooking gas by Rs 35 a cylinder and kerosene by Rs 3 a litre. The country's chief economic adviser Kaushik Basu had last month said that he expects the hike in fuel prices to lead to one percentage point rise in inflation.

"We expect WPI inflation to remain above 10 per cent until July and above 8 per cent until October. Anchoring inflation expectations is likely to remain a key policy concern for the RBI," Barclays said in a research note.

In June, the fuel index rose by 1.7 per cent, due to higher prices of kerosene (9 per cent), electricity (4 per cent), petrol (2 per cent) and liquefied petroleum gas (3 per cent).

Food prices rose marginally by 0.20 per cent in June as prices of cereals, rice and wheat declined on a month-on-month basis.

Among manufactured items, wood products prices rose by 5.4 per cent due to higher rates of plywood commercial planks.