India cuts petrol, diesel prices to curb inflation

INDIA: India stepped up its efforts to control inflation, running at its highest in more than two years, by cutting government-controlled retail fuel prices for the second time in three months.

The move, which reduced retail prices of petrol by 4.5 percent and diesel by 3.2 percent, came as data showed wholesale prices, India's most widely watched measure of inflation, rising at an annual rate of 6.73 percent.

Shares in state-run refiners ended more than 1 percent down while government bond prices rose after the announcement, the second such reduction since global oil prices tumbled from record highs last July.

Oil Minister Murli Deora said the price cut was driven partly by the recent dip in global oil prices and the ruling Congress Party's desire to protect people from inflation.

"Keeping the totality of circumstances in mind, it was decided that the prices of petrol and diesel will be reduced," Deora said.

The Indian government sets retail prices of fuel to make it affordable to the poor. It compensates state-run refiners for some of the cost but not private refiners.

Economists say the Indian economy, Asia's fourth largest, is in danger of overheating as it clocks an estimated 9.2 percent growth rate for the fiscal year ending in March, and the central bank has also been trying to tamp down price pressures, raising banks' cash reserve requirements on Tuesday to dampen lending.

However the price cuts may give a boost to oil demand in India, the third-biggest consumer in Asia, increasing its need for imports. Domestic oil sales rose by 4 percent in December, just after a previous official fuel price cut.

The ruling coalition is desperate to keep prices under control as it contests elections in three key states.

The government has taken a number of fiscal measures to control inflation, including cutting duties on metal and steel, and analysts say it could cut import and excise duties further in the annual budget due on Feb. 28.

An official told reporters duties on cement, metals and paper were also under review, while Trade Minister Kamal Nath said he saw no signs of overheating.

Late on Thursday, Prime Minister Manmohan Singh said the steps taken would moderate inflation in the coming weeks.

"We hope in the next couple of weeks, we will see the positive results from the action we have taken," he said.

Finance Minister Palaniappan Chidambaram also said he was confident of moderating inflation and the price cuts should help.

Indranil Pan, an economist at Kotak Mahindra Bank, said however the government had resorted to cutting fuel prices as monetary policy action did not seem to be controlling inflation.

"The move runs contrary to logic, given the fact that globally oil prices seem to have stabilised between $55-$60 per barrel," Pan said. Crude prices hovered near $58 per barrel on Thursday after a fall of nearly 2 percent on Wednesday.

An official from state-run Indian Oil Corp. , the country's top refiner, said the price cut was likely to cost the firm 3.9 billion rupees ($88.5 million) in revenues by the end of March.

New Delhi, Friday, Reuters