?Oil price-induced inflation to trigger further rate hike?

Standard Chartered expects inflation to average 8.72%, for financial year 2008-09, thereby increasing the probability of a hike in the key policy rates ? reverse repo (at 6.0%) and repo (7.75%) by 25bps each by the July quarterly policy meeting.

?With an increase in retail fuel prices, cut in excise and customs duty and issuance of oil bonds, there would be a negative impact on inflation as well as the fiscal deficit,? said economists, Shuchita Mehta and Anubhuti Sahay with Standard Chartered.

On Wednesday, the government decided to raise petrol prices by Rs 5 per litre and diesel prices by Rs 3 per litre, representing hikes of 10% and 8% respectively. Surprisingly, prices of LPG, which have been unchanged in the past due to political compulsions, were also raised by Rs 50 per cylinder, while prices of kerosene were left unchanged.

However, custom duties have been reduced on crude from 5% to 0%, diesel and petrol from 7.5% to 2.5% and other petroleum products from 10% to 5%. Excise duties on petrol and diesel have been reduced by Re 1 per litre each, from Rs14.4per litre and Rs 4.6per litre earlier. ?Given that petrol, diesel and LPG together have a weight of 4.75% in the WPI index, the fuel price hike would have a 60 bps impact on inflation. We expect inflation to remain in the 7.5-8.5% range in the coming months,? said a report from Citi.

A report released by Crisil after the fuel hike revealed that there would be a direct impact on headline inflation The revision of petrol, diesel and LPG prices, with push up inflation by 95 basis points taking into account direct and indirect impact. Out of this, the direct impact will be 51 basis points with the highest contribution coming from the hike in the LPG price hike. The indirect impact which will felt over the course of next few months will be 44 basis points.

?Revenue loss of Rs 22,000 crore is expected as a result of reduction in customs and excise duty. The oil marketing companies are expected to gain Rs 38,200 crore due to the price hikes and excise duty reduction. The refining companies are expected to gain Rs 12,000 crore from customs duty reduction,? the report said.

The under-recoveries of the oil marketing companies (OMCs) are expected at Rs 2,453 billion with oil price at around $ 130/barrel. The government is expected to issue the oil bonds worth Rs 94,600 crore in 2008-09.

Crisil says as a result of increased burden of oil bonds, government?s off-budget liabilities would increase to 1.80% of GDP.