Fuel price cut by the government has raised fears of deflation with economists expecting an overall decline in the prices early next fiscal.
"Oil price cut would bring down inflation sharply in the next 15 days. By end of March, it could reach below two per cent. In a month of so from there, we might see decrease in the price level, that is deflation," said D K Joshi, principal economist, Crisil.
The government last night slashed prices of petrol by Rs 5 a litre, diesel by Rs 2 per litre and cooking gas (LPG) by Rs 25 per cylinder.
Expressing fears of deflation hitting India in the next three to four months, HDFC Bank chief economist Abheek Barua said, "The fuel price hike could have a 40 basis point impact on inflation. I expect it to fall to 1-1.5 per cent by March. By April-May, we might see deflation"
Having declined for the 10 consecutive weeks, the inflation for the second week in a row rose to 5.64 per cent for the week ended January 17.
Earlier, it touched a peak of 12.91 per cent in August last year. Thereafter inflation, measured by movement in wholesale price index, continued the downward march and dipped to below the double-digit mark in November.
Meanwhile, Minister of State for Finance P K Bansal has also said the cut in petroleum prices will bring down inflation by more than one percentage point.
Global financial firm Citi too said that inflation was likely to fall to two per cent by March end.
"Given that petrol, diesel and LPG together have a weight of 4.75 per cent in the whole price index, the fuel price hike would have a 40 bps impact on inflation. This will result in headline inflation falling to two per cent by end-March," Citi said.
