DNA Money Edit: Oil prices and inflation fears

With oil prices rising, inflation demon is likely to raise an ugly head. According to the Reserve Bank of India (RBI), every 5% rise in oil prices may stoke inflation by 0.22%. In Mumbai, the price of petrol touched Rs 88.12 per litre on Monday and the diesel, Rs 77.32. Economists fear that the rising fuel prices combined with a falling rupee are likely to hit the demand.

Consumers in the two poll-bound states of Rajasthan and Andhra Pradesh are a happy lot after their respective governments reduced VAT, making oil cheaper by around Rs 2.50. While some more states may be forced to toe the line, most others are likely to delay such moves until closer to their respective election dates.

What is exacerbating the problem is the continued fall in rupee. It fell to a fresh low of Rs 72.67 to the US dollar before closing at Rs 72.45, nearly 13.8% down during the calendar year so far. This has forced the RBI to dip into its foreign exchange (forex) reserves to defend the rupee. The reserves, which touched a life-time high of $426 billion in April, are believed to have dropped below the psychological $400-billion level. The finance ministry is now looking at a deposit scheme to encourage non-resident Indians to invest in the country to help lift rupee.