The stage seems set for a jump in inflation as the government announced Rs 4 a litre hike in gasoline and Rs 2 a litre hike in diesel, translating into about 9 per cent and 7 per cent spike in the two, respectively. This will push up the fuel index, which will have a direct bearing on inflation.
Analysts say prices of essential commodities like fruits and vegetables will see a spike in the immediate future. In the short-term, India's corporate bottomline won't be spared either as the price hike would ultimately lead to increase in transport cost of raw material and finished goods.
India's inflation accelerated faster-than-expected to an eight-month high of 4.74 per cent in the third week of May 20 as prices of fruits, vegetables, pulses and other farm products rose, the government said on June 2. That's the highest since October 8.
The inflation is already in an uptrend and thus, logically, the impact of higher-than-expected fuel price hike will be very pronounced. A Merrill Lynch report factors in a two-stage hike in wholesale price index. It estimates that by the time full passthrough takes effect, WPI inflation will rise by 55bps by mid-June from the current annual rate of 4.74 per cent.
Keeping in mind the higher fuel prices and an expected rise in manufacturing inflation, ML estimates that overall inflation rate could peak at around 6.8 per cent by early next year (4QFY07) and end FY07 at 6.3 per cent YoY.
It may be recalled that inflation rate had gone up to 4.74 per cent for the week ended May 20, up from 4.32 per cent in the previous week. The rate of inflation, however, was lower than 5.38 per cent recorded in the corresponding week last year. The scenario is likely to change once the impact of price rise is felt on the inflation rate.
Not surprisingly, ML estimates are way above the Central Bank forecast. The Central Bank has forecasted to end the current fiscal year with an inflation ranging at 5.0-5.5 per cent.
The hike also reinforces the belief that it's just a matter of a month's wait before the central bank raises interest rates at a policy review in July.
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