"The direct and indirect impact on WPI is estimated to be about 2 per cent. Combined with the effect of the high base tapering off, we expect inflation to be in the 5.5 per cent to 6 per cent range by the end of the fiscal", the I-Sec report said.

Diesel, the report pointed out, carries a 2.15 per cent weight in the WPI and the direct impact if this hike would be 0.86 per cent. The impact, according to I-Sec, would also be felt through the increase in costs for freight (and to some extent electricity generated by some captive power plants).

"The oil pool account subsidy on LPF and kerosene has also shot up but there has not been any official indication of a price revision. We see that the last three rounds of a steep price hike in fuel products led to an increase in inflation but the impact tapered off in a few months", the report said.

The report pointed out that the fuel group inflation has been slowly increasing over the last few months and the year-on-year (YoY) inflation was 5.5 per cent in September 1999. The inflation has been driven by increase in electricity prices and LPG prices, the report points out.

According to I-Sec, there should be a positive correlation between fuel group inflation on prices of primary articles and manufacturing products. "However month-on-month data (from April 1992) does not indicate a significant positive correlation between fuel group and the other two groups. The reason could be that fuel prices have been administered for a large part of the period and the price movement of primary and manufactured goods is dominated by other factors. Having said that we do note that the primary articles index and manufactured products index have moved in tandem with fuel prices on the last three occasions: September 1993, July 1996 and September 1997,when fuel prices had a steep jump", the report said.

I-Sec further added that though there is am improvement in the demand for some manufactured products like cement and automobiles, most sectors continue to operate under low capacity utilisation and the ability to pass on the price hike to consumers remains limited.

"The effect of a rising base also tapers off after November and this likely to be reflected in the WPI inflation numbers. In particluar, the crop output this year is reported to have been impacted by an erratic monsoon and this could impact food prices though the impact is expected to be limited on account of comfortable level of buffer stocks. We expect WPI inflation to be in the range 5.5 per cent-6 per cent by the end of the fiscal. This level of inflation is unlikely to trigger off any monetary action, and the impact on interest rates would be minimal", the report adds.