Sujay Mehdudia

NEW DELHI: The decision to cut fuel prices could have a positive impact on inflationary trends and result in reduction in prices of essential commodities.

The government is positive about the outcome and feels that it will help bring down inflation to around 3 to 4 per cent by March this year. Experts say that as energy is the backbone of all economic activity, it is bound to have an all round impact.

It was also felt that the price cuts would serve as an incentive to the Reserve Bank of India (RBI) to lower interest rates.

Global financial firm Citi said given that petrol, diesel and LPG together had a weightage of 4.75 per cent in the wholesale price index, fuel price hike would have a 40 bps impact on inflation. The price cut would result in headline inflation falling to 2 per cent by end-March, it said in its global market report. Moreover, the negative patch in WPI that was expected in June-September quarter could occur earlier.

Industry chamber FICCI said the price cut would ease costs pressure on a range of consumer products, including bulk items such as food grains, fruits and vegetables. This, together with the lower LPG prices, would significantly help consumer households.

The automobile industry was of the view that the second successive fuel cut would create a psychological impact on the consumers and could in turn create some demand for vehicles.

The government felt that the price cut would bring down prices that had been showing an upward trend during the last two weeks.

Inflation on Thursday rose to 5.64 per cent for the week ended January 17, from 5.60 per cent the previous week. The WPI index was on a downward march and had dipped below the double-digit mark in November. “Inflation has marginally increased this time. But it will continue its downward trend once the impact of price cuts is felt. It will come down to 3 per cent by March-end as the RBI has stated,” Minister of State for Finance, P.K. Bansal said here.