Govt may up fuel prices once more by October - HDFC Bank

MUMBAI (Reuters) - HDFC Bank expects to see another round of domestic fuel price hikes by October due to rising crude prices, it said in a note on Friday.

Oil prices have doubled from a low of $32.40 a barrel in December last year and surged over 42 percent in the last quarter -- the largest quarterly gain since 1990 -- partly on hopes of an economic recovery.

The government raised prices of gasoline and diesel by as much as 10 percent on Wednesday, its first increase this year, passing some of oil's rally into an economy just beginning to find its feet amid a global recession.

HDFC Bank said the first round impact of the price hike could push up inflation by 35-40 basis points, while the second round impact through higher food prices on account of an increase in transportation costs could be higher.

However, HDFC Bank said the recent fuel price hike is unlikely to outweigh the impact of the high base effect on year-on-year inflation and wholesale price index (WPI) will continue to fall till September.

Higher fuel prices, along with a shrinking output gap and the liquidity overhang created by an accommodative monetary policy through July should see a rapid gain in WPI from -0.7 percent in September 2009 to 6.1 percent by December and 8.5 percent by March, 2010, the note said.

Given that the Reserve Bank of India's (RBI) inflation projection for March 2010 is 4 percent, it is likely to start monetary tightening in the fourth quarter of 2009/10.

"An exit strategy out of the RBI's open market operations buy-back operations to accommodate government paper supply through 2009/10 could be put in place as early as October-November 2009 followed by a 50-100 basis points hike in the cash reserve ratio in January 2010," the note said.

HDFC Bank also said it expects quantitative policy instruments to be given precedence over hiking rates like the repo and reverse repo in the initial phase of monetary tightening since liquidity management is likely to be the first line of defense against rising inflation.