Prices of petrol and diesel had not changed since this February, while prices of domestic cooking gas had not been hiked in the last three years. These commodities constitute 4.7 per cent of the WPI.
Following today's price hike, petrol became dearer by Rs 5 per litre, diesel by Rs 3 a litre and cooking gas by Rs 50 a cylinder.
"Assuming the base inflation for the week ended June 7 to be around 7.8 per cent, we are looking at a WPI inflation number of 8.5-9 per cent over the next few weeks. Factoring in the probable revisions by around 40 basis points to the provisional inflation numbers, the actual inflation level is likely to be over 9.5 per cent," said Saugata Bhattacharya, vice-president (business and economic research), Axis Bank.
The WPI inflation rate touched 8.1 per cent for the week ended May 17.
Soon after the hike was announced today, Petroleum Secretary MS Srinivasan said the increase in fuel prices would raise inflation by 0.5 to 0.6 percentage points.
Lehman Brothers' India economist Sonal Verma also said that inflation rate could touch 9.5 per cent for the week ended June 7. "A lower base last year will further add to the inflation rate," she added. Inflation rate stood at 4.28 per cent for the week ended June 9, 2007.
Crisil's Principal Economist Dharmakirti Joshi expects the WPI to go up by 51 basis points (bps)as a direct effect of the price hike. "However, the second round impact will add up another of 44 bps within two to three months," he added. In effect, he sees the index rising by 95 bps.
Lehman Brothers has also revised its annual inflation estimate for 2008-09 to 8.5 per cent from the earlier forecast of 8.2 per cent. It has also reduced its GDP forecast to 7.3 per cent from 7.6 per cent for the current fiscal. "The increase in fuel prices will have a negative impact on consumption and growth," Verma said.
However, analysts are divided over the response of the monetary policy that the central bank may opt to further curb inflationary expectations. While Joshi does not expect any further monetary tightening, Verma has forecast another 100 bps hike in cash reserve ratio by the end of this fiscal. Axis Bank's Bhattacharya expects a policy intervention in the form of a repo rate hike.
