Govt raises fuel prices, oil firm shares surge

By Nidhi Verma

NEW DELHI (Reuters) - The government modestly raised retail prices of auto fuels on Thursday, the first increase in 20 months, sending shares of state oil retailers surging but dashing hopes of an early cut in interest rates by the Reserve Bank of India (RBI).

Oil Minister Murli Deora said the price of petrol will rise by 2 rupees ($0.05) per litre, or 4.6 percent, while the cost of diesel will go up by 3.3 percent with a 1 rupee increase.

Analysts said the relatively small adjustments were unlikely to add significant pressure to inflation, but with wholesale prices inching up in recent weeks a rate cut was now unlikely.

"We tried our best not to increase but it was just not possible to bear the burden with crude prices crossing $100 a barrel on Jan. 2 and $90 now," Deora told reporters.

Expectations of a rate cut built up after a government forecast last week showed economic growth may soften to 8.7 percent in the 2007/08 fiscal year from 9.6 percent in the previous year.

India forces state retailers to sell fuel cheaply to protect poor consumers and help curb inflation.

It did not increase prices in 2007, even though the cost of crude rose by more than half in the year, and state retailers have been losing millions of dollars a day.

The price increases could, though, anger allies and trigger protests from communist parties which provide the ruling coalition with a parliamentary majority.