Fuel inflation jumps; rate hike seen coming


Reuters | Thu Jul 8, 2010 | 12:20pm IST

India’s food inflation eased, but fuel inflation accelerated in late June and a recent hike in fuel prices kept the case for the Reserve Bank of India (RBI) to top up its last Friday’s rate hike when it reviews policy on July 27. The second straight weekly fall in food inflation would give little cheer to policymakers as the recent fuel price hike could push up by over 1 percentage point what is already the highest headline inflation level among the G20 major economies. Data released on Thursday showed the food price index rose an annual 12.63 percent in the year to June 26, slower than the previous week’s 12.92 percent, largely as prices in the year-ago period were high. The fuel price index went up by 18.02 percent during the period, compared with the previous week’s 12.90 percent. The index will see another jump in its next reading, with the government having raised fuel prices from June 26.

The primary articles index rose by 16.08 percent, compared with 14.75 percent in the previous week. Following the fuel price decision, the RBI lifted its key rates earlier-than-expected by 25 basis points, the third hike so far this year, as it struggles to bring down inflation that a senior government official said could hit 11 percent in June. "When the full pass-through of the hike comes, there will be more of an impact on the prices of commodities," N.R. Bhanumurthy, an economist with New Delhi-based think tank National Institute of Public Finance and Policy said. "I would expect another 25 basis points hike in the July 27 review and after that one more round of an off-cycle hike."

A Reuters poll after the interest rate decision showed analysts raised their outlook for interest rates this year. Nearly all of those polled expect a 25-basis point hike during the quarterly policy review. The yield on the benchmark 10-year bond briefly went up 1 basis point to 7.61 percent after the data. The government is pinning its hopes for cooling food prices on the progress of the summer monsoons, which irrigate the bulk of India’s farms. After early shortfalls, the rains have improved and have covered all of the country, brightening the outlook for crops. With over 40 percent of India’s 1.2 billion people living on under $1.25 a day high prices are a liability for the ruling Congress party which could see voters deserting it in the eight upcoming elections this year and next. The hike in fuel prices saw some of the largest protests in recent years and rallied together the often-squabbling opposition parties against the government.

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