(Bloomberg) -- India's decision to raise duties on gasoline 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 Friday to increase federal taxes on transport fuels by 2 rupees a liter 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.
Read: With Elections Over, Modi Raises Taxes on Fuel to Cut Budget Gap
“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% for FY20.”
That projection is below the Reserve Bank of India's medium-term inflation goal of 4%. The central bank forecasts consumer-price growth in a range of 3-3.1% in the first half of the fiscal year through September, and 3.4-3.7% 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% in the March quarter.
Data on Friday will probably show inflation inched up to 3.2% in June from a year earlier, up from 3.05% in May, according to a Bloomberg News 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.
What Bloomberg Economists Say
“Given the sharp drop in global crude oil prices, the excise duty and cess on gasoline 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.”
-- Abhishek Gupta, economist at Bloomberg Economics
Brent oil has fallen 17% 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.
To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram
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