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India’s decision to raise duties on petrol and diesel is unlikely to threaten the inflation outlook, keeping alive expectations of more interest rate cuts from the central bank.
Finance Minister Nirmala Sitharaman’s decision on Friday to impose an additional special excise duty on transport fuels by ₹1 a litre will have an impact of less than 10 basis points on headline inflation, according to Teresa John, an economist at Nirmal Bang Equities Pvt. The second-round effects could push up the inflation rate by slightly more than 10 basis points as higher transport costs spread to other parts of the economy.
Also read: Petrol price hiked by ₹2.45, diesel by ₹2.36 following tax hike in Budget
The decision doesn’t really move the needle much for inflation, said John, who sees the first-round impact at 6-7 basis points. Average headline inflation would be around 3.8-3.9 per cent for FY20.
That projection is below the Reserve Bank of India’s medium-term inflation goal of 4 per cent. The central bank forecasts consumer-price growth in a range of 3-3.1 per cent in the first half of the fiscal year through September, and 3.4-3.7 per cent in the second half.
The RBI has already lowered its benchmark interest rate three times this year and the markets expect more easing in the coming months as policy makers seek to bolster economic growth that cooled to a five-year low of 5.8 per cent in the March quarter.
Data on Friday will probably show inflation inched up to 3.2 per cent in June from a year earlier, up from 3.05 per cent in May, according to a Bloomberg survey. The rise will in part be due to higher food costs, though underlying price pressures are likely to be subdued, highlighting a slowdown in demand in the economy.
“Given the sharp drop in global crude oil prices, the excise duty and cess on petrol and diesel is unlikely to change our inflation projections. Still, the direct impact could be estimated at about 10-12bps on headline inflation. We don’t expect any indirect impact as input costs are broadly declining in the economy,” says Abhishek Gupta, economist at Bloomberg Economics.
Brent oil has fallen 17 per cent in the past year because of oversupply and fears of shrinking global demand amid trade wars, forcing producers to extend output reductions to at least March.
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