Fuel, food inflation ease; price pressures remain

NEW DELHI Thu Jul 7, 2011 1:26pm IST

Vendors arrange vegetables on their carts at a wholesale vegetable market in Chandigarh November 8, 2009. REUTERS/Ajay Verma/Files

Vendors arrange vegetables on their carts at a wholesale vegetable market in Chandigarh November 8, 2009.

Credit: Reuters/Ajay Verma/Files

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NEW DELHI (Reuters) - India's fuel inflation eased in late June on lower petrol and other decontrolled (or market-determined) fuel prices, but the recent hike in state-set fuel prices is seen keeping headline inflation high and pressure the RBI to raise rates further later this month.

Annual food inflation eased to a seven-week low, but the knock-on effects of last month's increase in diesel, kerosene and cooking gas prices are expected to nudge up food prices.

The fuel price index climbed 12.67 percent in the year to June 25 from 12.98 percent a week earlier, while the food price index rose 7.61 percent compared with an annual rise of 7.78 percent in the previous week.

The primary articles index rose 11.56 percent in the year to June 25 from 11.84 percent a week earlier.

India's benchmark five-year overnight indexed swap (OIS) rose 4 basis points (bps), while the 10-year bond yield rose 1 bp after the weekly inflation data, reflecting the market's concerns on high inflation.

The five-year OIS was at 7.73 percent, up from 7.69 percent before the data. The one-year OIS rose 1 bp to 8.06 percent.

"If you look at the trend of prices, petrol has actually softened this week significantly, though LPG and diesel prices have gone up," said N. Bhanumurthy, an economist with New Delhi-based policy think-tank National Institute of Public Finance and Policy.

"Besides, crude had softened since the domestic price revision though it has again gone up. That is why the fuel basket as a whole has softened."

Data released by the government showed prices of kerosene, high speed diesel and liquefied petroleum gas (LPG) had risen during the week, while those of bitumen, furnace oil and Naphtha had declined.

BATTLING INFLATION

The Reserve Bank of India raised key interest rate last month for the 10th time in just over a year to combat sticky headline inflation, currently hovering above 9 percent.

This figure is expected to hit double digits again after the government last month raised prices of diesel, cooking gas and kerosene to cut revenue losses of state fuel retailers for selling these products at subsidised rates.

The market expects the RBI to raise key rates by a quarter percentage point at its policy review on July 26.

Diesel, cooking gas and kerosene comprise 6.4 percent of the total wholesale price index (WPI) basket and 70 percent of the fuel component of the WPI.

"The net impact on the headline is likely to be more prolonged. In all, June WPI is likely to remain rooted in 9.0 percent handle, signalling no let-up on the need to tighten benchmark rate at the July meet," said Radhika Rao, an economist with Forecast PTE, Singapore.

Goldman Sachs expects the rise in diesel prices to add around 90 basis points to headline inflation, a recent report showed.

New Delhi has budgeted a fuel subsidy bill of $5.2 billion for 2011/12, assuming oil prices below $100 per barrel, but with global crude prices showing little sign of moderation, analysts expect the government to hike fuel prices further in coming months.

Brent crude climbed above $114 on Thursday, supported by a more-than-projected drop in U.S. crude stocks and expectations that China's monetary tightening cycle may be nearing its end.

Even after the fuel price hike, state-run oil companies are still expected to lose about 1.2 ($26.9 billion) trillion rupees in the current fiscal year.

India is likely to pay an additional around 300 billion rupees in fuel subsidies after August, a government source told Reuters on Wednesday.

($1=44.48 rupees)

(Additional reporting by Neha D'Silva; editing by Malini Menon)

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