Prices of petrol and diesel had not changed since February 2008. However, prices of domestic cooking gas had not been hiked since the last three years. These commodities constitute 4.7 per cent of the WPI.
"Assuming the base inflation in the week of June 6 to have been 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.
WPI inflation rate touched 8.1 per cent for the week ended May 17.
Soon after the hike was announced today, petroleum secretary M.S. 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 as a direct effect of the price hike. "However, the second round impact will add up another 44 bps within two to three months time," he added. In effect, he sees the index rising by 95 basis points.
Lehman Brothers has also revised its annual inflation rate for 2008-09 to 8.5 per cent from the earlier forecast of 8.2 per cent. It has also reduced its gross domestic 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 monetary policy response that the central bank may opt for to further curb inflationary expectations. While Crisil's Joshi does not expect any further monetary tightening, Lehman Brothers' Verma is forecasting another 100 bps hike in cash reserve ratio by end of this fiscal. Axis Bank's Bhattacharya expects a policy intervention in the form of a repo rate hike.
