Major banks have increased their inflation estimates after the increase in petrol and diesel prices.
After the announcement of increase in petrol and diesel prices, retail inflation may increase by 15-20 basis points (0.15-0.20 percentage points) in the coming months. Economists have warned that rising transport and logistics costs could lead to a second round of widespread price pressure across the economy. Radhika Rao, senior economist and executive director, DBS Bank, said that considering the weightage of petrol and diesel in the CPI (consumer price index) basket, a 3-5 per cent increase is likely to increase the core inflation rate by 15-25 basis points, besides having a second-round effect.
Inflation pressure may increase
According to Rajni Sinha, chief economist at CareAge Ratings, retail fuel prices could directly contribute 15 basis points to inflation, while rising costs of transport, logistics and agricultural inputs could exert an additional indirect pressure of 10-15 basis points. The total share of petrol and diesel in the CPI basket is 4.8 percent. Amid a huge surge in global crude oil prices due to the ongoing conflict in West Asia, state-owned oil companies on Friday increased the prices of petrol and diesel by Rs 3 per litre. This is the first increase in four years. The move comes days after the government raised import duty to discourage import of gold and silver, ease pressure on foreign exchange reserves and support the rupee.
How much did these banks estimate inflation?
These banks also estimated inflation
Earlier this week, milk prices were also increased by Rs 2 per liter. ICRA Chief Economist Aditi Nair said that since this increase was made in the middle of the month, it will impact the inflation figures of May and June. Barclays Chief India Economist Aastha Gudwani said that when the impact of the increase in import duty on gold and increase in fuel prices is fully reflected in the June inflation data, it is expected that the headline inflation will increase by 10 basis points and 15 basis points respectively. Petrol prices increased marginally by 0.07% in April, while diesel prices remained unchanged.
Crude oil crosses 100 dollars
Megha Arora, director, India Ratings ICRA, said the actual impact on CPI inflation is likely to be greater as the fuel price increase will impact prices of compressed natural gas, transportation, freight, e-commerce industries and diesel users—including coastal fishermen and aqua farmers. Since the conflict in West Asia began on February 28, Brent crude prices have increased from $ 73 per barrel to more than $ 100 per barrel. India imports more than 85 percent of its crude oil needs, about half of which passes through the Strait of Hormuz, which is now mostly closed.
How much can inflation be?
ICRA estimates that the inflation rate in May will be 4.3 percent, which is higher than the earlier estimated 4.1 percent. Whereas Ind-Ra’s estimate is 3.8 percent and IDFC First Bank’s estimate is 3.9 percent, assuming that there will be no further change in fuel prices. Retail inflation increased to 3.5 percent in April, which was 3.4 percent in March. The Reserve Bank of India maintains an inflation target of 4%, with a margin of 2% on either side.
Arora said that due to the combined effect of prices of petrol, diesel and milk, inflation is likely to increase by about 42 basis points. He further said that its impact in May could be around 20 basis points. Madan Sabnavis, Chief Economist of Bank of Baroda, said that its full impact will be visible in three-four months, when it will spread in the market through secondary and tertiary channels.
