Fuel price hike impact on inflation just 1%: Rangarajan

"Obviously, it will have some impact on inflation. It might have a 1 per cent impact on inflation over a period of time," he said on the sidelines of the 33rd Annual General Meeting of the Bangalore Chamber of Industry and Commerce here.

Inflation during the month of May, 2010, stood at 10.16 per cent.
Describing the fuel price hike as an inevitable decision, he said, "The domestic prices of petroleum cannot be divorced from the way in which crude oil is behaving in the international market. This will only result in oil marketing companies incurring loss," he said.

"Decontrolling the petrol price would mean the oil marketing companies will have the freedom in adjusting the prices as per the crude rates," he said.
"If it was not done, we would have to find some way to meet the under-recovery of oil marketing companies. It was a difficult decision...," he said and went on to describe the decision as a 'Hobson's choice'.

"I think it is a step in the right direction," he said.
Rangarajan said he expected the inflation rate to settle at six per cent by March, 2011. "In the short-term, it will start declining, but it may remain high for the next three or four months," he added.

To a question whether the move would see the RBI tightening interest rates, Rangarajan, a former governor of the central bank, said, "The RBI will make up its mind not based on oil price hike alone, as this was clearly an administrative action."
On the other hand, he said the RBI would look at the overall inflationary situation, particularly in the manufacturing sector, and take a decision.

On borrowings, he said, "It will depend on the overall fiscal deficit. It could be smaller than what was anticipated in the Budget. But it will all depend on overall expenditure. All I can say at this moment is that the fiscal deficit as budgeted would be maintained."
Commenting on the devaluation of the Chinese currency, the yuan, he said, "It is a good thing that China has done this. China is a surplus economy in terms of trade and this decision was expected."

"They have been holding for the last one or two years... particularly during the economic crisis, they have been following a policy of pegging the rate of yuan against the dollar. It is a good thing that they have decided to move away from that. So it will be good for all economies, including India," Rangarajan said.