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New Delhi: India modestly raised retail prices of auto fuels on Wednesday for the first time in 20 months, sending shares of state-run oil retailers surging but dashing hopes of an early cut in interest rates by the central bank.
Indian oil minister Murli Deora said the price of petrol would rise by Rs2 ($0.05) per litre, or 4.6 per cent, while the cost of diesel would go up by 3.3 per cent with a Rs1 increase.
Analysts said the relatively small adjustments were unlikely to add significant pressure to inflation, but with wholesale prices inching up in recent weeks a rate cut was now unlikely.
Marginal impact
The decision could trigger protests from communist allies who provide the ruling coalition with a parliamentary majority.
"It was long overdue and should come as a partial relief to the state-run oil companies. There will only be a marginal impact on inflation," said T.K. Bhaumik, chief economist at Reliance Industries Ltd.
"It has been a question of trade-off between politics and economics. It was due for a long time. This raise had to take place but I don't think it is substantial."
India forces state retailers to sell widely consumed fuels cheaply to protect poor consumers and help curb inflation. It did not increase prices in 2007, even though the cost of crude rose by more than half in the year.
State retailers have been losing millions of dollars a day. New Delhi held out longer than most. Beijing caved in to pressure and raised prices by 10 per cent last November.
Elections in nearly a dozen states this year and national parliamentary polls due next year make the increases politically risky for the Congress-party led government, which will be looking to bag the votes of millions of rural poor.
Shares in leading retailer Indian Oil Corp provisionally closed up 12.4 per cent at Rs529.8 in a Mumbai market that rose 5.16 per cent.
Hindustan Petroleum Corp provisionally gained 14.2 per cent and Bharat Petroleum Corp rose 9.2 per cent to Rs458.
An oil ministry official said the price rises, which take effect from midnight, would bring oil firms additional revenues of Rs8.4 billion in the remainder of the financial year ending March 31.
Analysts said the rise in retail prices would prompt the central bank to keep a close vigil on inflation, which has been below its target for 2007-08 of about 5 per cent for some time now but has been edging up.
High inflation
Latest data showed annual wholesale price inflation was at a five-month high of 4.11 per cent and most analysts expected it to go higher on firm commodity prices.
India's central bank, concerned about price pressures stemming from rising food and fuel prices, kept its key lending rate at its highest since November 2002 in late January, warning that crude prices had not yet been fully passed on to consumers.
"The direct impact of this increase would be 15 basis points on headline inflation and the indirect impact would be around 30-35 basis points," said Indranil Pan, chief economist at Kotak Mahindra Bank.
The central bank next reviews policy in April. "With this pass-through in prices, the possibility of a rate cut in April has vanished considerably," Pan said.
World crude oil prices hit a record above $100 last month and have retreated to around $93 a barrel. But they are still sharply higher than a year ago, forcing many Asian nations to increase their heavily subsidised domestic pump prices.
The Indian crude basket has risen by about 181 per cent since April 2004, but following yesterday's decision petrol has been hiked by just 35 per cent and diesel by 45 per cent in the same period. India's last increase came in June 2006, when retail petrol prices went up by 9.2 per cent and diesel by 6.6 per cent.
It was long overdue and should come as a partial relief to the state-run oil companies. There will only be a marginal impact on inflation."
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