Fuel price hike: Inflation may rise in short term

The government's move to hike fuel prices will stoke inflation with monthly wholesale price index expected to rise by 0.9 percentage points in the short term, India's chief economic adviser Kaushik Basu said on Friday.

"I expect an increase of 0.9 percentage in the monthly WPI inflation," Kaushik Basu said. He, however, said that the bold reform would result in lower fiscal and revenue deficits, thereby helping in cooling inflation in 6 to 9 months.

". . .since these changes will cause the fiscal and revenue deficit to decline, they will exert downward pressure on prices. Hence, though the immediate impact of this policy will be to increase inflation, in 6 to 9 months we will have lower prices than what would have happen in the absence of this much needed reform," Basu said.

In a major decision to bring petroleum products in line with market rates, the government on Friday freed petrol from all pricing controls and hiked diesel prices by Rs 2 a litre.

With this decision, petrol will cost up to Rs 3.73 per litre more, households will have to pay an additional Rs 35 per cylinder and poor man's cooking medium kerosene will be dearer by Rs 3 a litre from Friday.

Inflation is already in double digits as it rose to 10.16 per cent in May from 9.59 per cent in April because of elevated food prices and certain manufactured items like metals turning expensive.