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'Fuel price, fare hikes may keep inflation high'

On Wednesday, the Centre increased rail fares by up to 25%

BS Reporter  |  New Delhi 

The increase in fuel prices and train fares could prevent headline inflation from moderating in the near term, according to C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council.

“Under a normal situation, we expect inflation to come down to about seven per cent by March. But we are taking actions to correct the suppressed inflation. They may come in the way of headline inflation coming down. But in the medium term, it (fuel price and fare hikes) is the right kind of decision,” Rangarajan said during his inaugural address in a conference organised by the Indian Institute of Foreign Trade here today.

He remained confident that inflation would ease to six per cent by the end of the next financial year.

Yesterday, the Centre had increased rail fares by up to 25 per cent. This was the first time in 10 years that fares have been increased. According to sources, the government might also raise diesel and subsidised liquefied petroleum gas (LPG) prices in a phased manner.

In September 2012, the Centre had capped the number of subsidised LPG cylinders and increased the diesel price by Rs 5 a litre.

Rangarajan said these steps were necessary for fiscal consolidation, though they might lead to a higher-than-expected inflation rate in the near term.

India’s wholesale price index-based inflation increased at its slowest pace in 10 months in November and rose 7.24 per cent from a year earlier. The easing price pressure raised hopes of reduction in interest rates in January 2013.

The Reserve Bank of India (RBI) has been keeping policy rates firm as inflation continued to remain above its comfort zone.

“I think RBI will wait for the price data that will come in a few days and that will be a key factor in determining their action in the next policy,” said Rangarajan.

The data on inflation for December will be released on January 14 — a fortnight before RBI’s third quarter monetary policy review.

First Published: Fri, January 11 2013. 01:06 IST