The freeing of government subsidised petrol prices could stoke inflation, leading to higher interest rates, global research firm Macquarie said.
"We believe the first step towards oil price deregulation is a positive step on the reform front, but increases the risk of persistent high inflation leading to faster rate hikes," Macquarie said in its 'India Strategy' report.
On Friday, the government hiked prices of petrol by Rs 3.50 a litre and diesel by Rs 2 a litre also raised LPG rates by Rs 35 a cylinder and kerosene by Rs 3 a litre.
The report said the increase in fuel and LPG prices is likely to contribute around 90 basis points to headline WPI in the month of June.
The inflation rate, as measured by the WPI, was 10.16 per cent in May, exceeding analysts' expectations, as the increase in food prices continued. It had breached the double-digit mark at 10.3 per cent in February, while peaking at 11.04 per cent in March, as per revised figures.
Macquarie said the hike in fuel prices "would likely keep the Y-o-Y inflation well above the 10.2 per cent level registered in May, unless food prices ease".
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This could impact interest-rate sensitive sectors like banking, real estate and autos, it added.
The Macquarie report is in line with the estimates of Chief Economic Advisor Kaushik Basu, who had said the impact of the fuel price hike on inflation would be around 0.9 per cent.
"I expect an increase of 0.9 percentage points in the monthly WPI inflation... The impact would largely be felt in the month of July," he had said.
Global crude prices are currently hovering around $77 a barrel. The hike in fuel prices will help trim the government's huge subsidy bills, as well as relieve the oil marketing PSUs of some of their staggering burden on account of selling these fuels below market prices.
Before the price hike, state oil firms used to lose about Rs 215 crore per day on selling fuel below the imported cost. While petrol was sold at Rs 3.73 a litre below the imported price, the loss was Rs 3.80 per litre of diesel, Rs 18.82 a litre of kerosene and a discount of Rs 261.90 on every 14.2-kg cylinder of domestic LPG.
"The post-subsidy under-recoveries of the PSU oil companies stood at roughly $4 billion in FY10 and would have possibly doubled without this price increase. All oil companies benefit from this deregulation, the benefit is tilted marginally more towards the downstream companies (IOC, HPCL and BPCL)," Macquarie said.