With rising crude oil prices widening the gap between the retail fuel price and their cost of production, the Reserve Bank of India on Tuesday called for an immediate hike in petrol and diesel prices, even if it adds to inflationary pressure and moderates economic growth.

“The critical assumption that petroleum and fertiliser subsidies would be capped is bound to be seriously tested at prevailing crude oil prices. Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, the RBI believes that this needs to be done as soon as possible,” said Mr D Subbarao, RBI Governor.

Releasing the Monetary Policy Statement for 2011—12, he added that the failure to increase retail prices would increase the government’s fiscal deficit.

The government has not allowed state oil firms to revise diesel prices since June last year when crude oil was ruling at $72—73 per barrel. Crude oil is today trading at over $110 a barrel in international markets.

Diesel prices will need to be hiked by over Rs 18 per litre if retail prices are to be brought at international parity and the June, 2010, decision of freeing its prices from government control is implemented.

Also, the government has not allowed oil firms to hike the price of petrol, a commodity which was freed from control in June last year. Petrol is currently being undersold by Rs 8.50 per litre.

In addition, domestic LPG and kerosene, too, are sold at an artificially lower price. Unchanged prices of diesel, domestic LPG and kerosene would mean that the government will have to find ways to meet the over Rs 1,80,000 crore revenue loss projected for the current fiscal.

Mr Subbarao said the currently prevailing high crude and commodity prices have been taken into account while projecting the 8 per cent GDP growth for this fiscal.

“Going forward, high oil and other commodity prices and the impact of the RBI’s anti-inflationary monetary stance will moderate growth,” he said.

The RBI said that it has arrived at an 8 per cent projection for GDP growth by factoring in international crude prices at an average of $110 per barrel for the full 2011-12 fiscal year.