The government decision to raise prices of petroleum products will push up inflation to over 10% in the coming months, says global banking giant Nomura.
"We estimate the hikes are likely to push the June WPI inflation above 9.5% and July WPI inflation above 10% y-o-y," Nomura said in its research note.
The whole price index, used to measure rise in prices of a range of products in a consumer basket, stood at 9.06% in May. WPI in April was recorded at 8.66%.
The government had last week announced an increase in diesel prices by Rs 3 per litre, domestic LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre.
"With transportation costs likely to rise due to the cascading impact of higher diesel prices, we estimate the combined direct and indirect impact at around 110 bps" Nomura said.
It said that the Reserve Bank might come in with another 25 basis points rate hike in its first quarterly monetary review on July 26.
The RBI has hiked key policy rates 10 times since March 2010 to rein in inflation, which it expects to remain at an average of 9% till September on account of high global commodity prices.
Besides, to help reduce the losses of domestic oil marketing companies, the government had slashed indirect taxes like customs and excise duties on crude oil and products,which will cause a revenue loss of Rs 49,000 crore in the current fiscal.
Nomura revised its fiscal deficit projection for the year 2011-12 from 5.2-5.5% on account of expected lower indirect tax collection.
"The cut in indirect taxes means a further reduction in revenue that we had not accounted for. Taking into account lower tax revenues and a higher subsidy bill, we revise our forecast of the fiscal deficit to 5.5% of GDP in FY12 from 5.2%," Nomura added.
However, the government has kept its fiscal deficit target for this fiscal at 4.6%.