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The government’s decision to raise natural gas prices could put pressure on retail inflation. Although the government has also announced the deregulation of diesel prices, experts believe the positive impact that would arise out of lower diesel prices is almost negligible on retail inflation.
Consumer price index (CPI)-based inflation cooled down to 6.46 per cent in September, the lowest level since January 2012 on the back of declining prices of fruits and vegetables. On Saturday, the government announced diesel price deregulation and the gas price increase from the current $4.2 per million British thermal units (mBtu) to $5.61 per mBtu. The switchover from government-dictated diesel rates to market pricing immediately reduces diesel prices by Rs 3.37 a litre.
“Diesel accounts for 0.04 per cent of CPI and 4.7 per cent of wholesale price index (WPI) inflation. Hence, the direct impact of lower diesel prices is likely to be significant on WPI, but almost negligible on CPI inflation,” said Sonal Varma of Nomura in a note to clients.
As gas-based power plants account for only about seven per cent of the total power generation in India, the impact of higher power costs on CPI inflation is likely to be insignificant, Verma said. “Thus, we judge the fuel reforms together could push up CPI inflation by about 20-30 basis points in the coming months,” she added.
In the fourth bi-monthly monetary policy review released last month, RBI had said that as far as its medium-term objective of six per cent CPI by January 2016 was concerned, “the balance of risks is still to the upside”. RBI had also flagged policy preparedness to contain pressures if the risks materialise.
Experts believe the repo rate, which stands and eight per cent since the start of FY15 might continue to remain so for the rest of the year. “A more benign inflation outlook will doubtless further stoke expectations of an earlier-than-expected policy easing by RBI. We remain skeptical for several critical reasons, however, especially given challenging base effects and disruptions to food production from the deficient monsoon are set to see inflation in food prices,” said Mole Hau of BNP Paribas in a note to clients.
Notwithstanding the Bharatiya Janata Party’s (BJP) success in Maharashtra and Haryana state elections and the BJP-led Central government's fuel reforms have sparked hopes for additional reforms, there are risks that could arise out of rebound in global crude prices. “Any sharp rebound in global crude prices will filter through as a negative trade shock, especially as petrol and diesel prices are now market-determined. Such an event will truly test the government’s resolve in keeping prices market-linked and not reviving state interference,” said Radhika Rao of DBS Bank in a note to clients.
