Global investment banker Barclays Capital has projected that inflation may surge to 17 per cent by September on back of another round of hike in fuel prices in the same month.
"We believe WPI inflation will remain in double-digit territory until May 2009. We expect WPI inflation of 17 per cent by September 2008," the report said.
For the week-ended June 28, wholesale prices-based inflation touched a new 13-year high of 11.89 per cent much higher than the Reserve Bank’s tolerance limit of 5.5 per cent for the current fiscal.
According to the report, the government is likely to hike fuel prices between 10 and 20 per cent again as early as September to limit fiscal risks.
Rise in the price of the Indian crude oil basket to $145-150 per barrel from the current $132 per barrel could be the trigger for another round of increase in fuel prices, it said.
The government last revised retail petroleum prices with effect from June 5, when petrol prices was increased by Rs 5 a litre, diesel by Rs 3 per litre and cooking gas by Rs 50 per cylinder.
This resulted in inflation touching a double digit figure of 11.05 per cent for the week ended June 7.
Last week, even Finance Minister P Chidambaram’s adviser Shubhashis Gangopadhyay predicted that double digit inflation will continue throughout the year 2008 and could impact the economic growth negatively.
Barclays Capital said, "we believe the momentum in core inflation will pick up steam in the next two quarters".
Over the next two quarters, manufacturing sector inflation would add to 200-300 basis points to the headline WPI rate, food and oilseed inflation would add 100-200 basis points, and energy inflation a further 100-150 basis points, it said.
The second-round effects of recent commodity price shocks are already passing through, and this process is expected to accelerate, it added.
RBI is also expected to further tighten monetary policy by hiking short term lending rate (repo rate) and mandatory cash requirements for banks to tame inflation.
The two monetary policy tools the RBI would utilise to rein in inflation would be the CRR and repo rate, it said.
"We forecast repo rate hikes of 200-250 basis points by end-2008, versus our earlier outlook for 150-200 basis points, from the current 8.5 per cent," it said.
In addition, the CRR which is currently at 8.75 per cent would be increased by 125-175 basis points by the year-end, it added.
The investment banker also revised average WPI forecast for the current year to 14 per cent from the earlier estimate of 13 per cent.
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