VINACHEM

Inflation dipped in April, but significant upward revisions to recent past readings and the prospect of rising energy prices will keep pressure on the RBI to raise rates in June and maintain its hawkish stance.

The easing was mostly on a slower rise in prices of some manufactured products, but analysts said such prices could quicken again because of Sunday's petrol price hike by oil firms and on a widely expected increase in state-set diesel prices.

The wholesale price index, the country's main inflation gauge, rose an annual 8.66 percent in April, above the median forecast for an 8.48 percent rise in a Reuters poll and below an upwardly revised 9.04 percent in March.

The February figure was revised to 9.54 percent, 1.23 percentage points higher than the provisional figure. Some analysts said the high quantum of revision could mean April's revised reading could be closer to 10 percent.

"What is worrisome is the large revision in the February inflation, which suggests that there are latent inflationary pressures," said Siddhartha Sanyal, chief India economist at Barclays Capital.

Most economists in recent Reuters poll expect the RBI to raise rates by at least another 75 basis points in 2011. The RBI's next review is June 16.

The Reserve Bank of India, which has been one of the most aggressive central banks in tightening policy, earlier this month raised rates by a higher-than-forecast 50 basis points and said it was willing to sacrifice a bit of growth in order to bring down inflation.

"Sticky inflation points to the need for more rate hikes and we expect two more increases this year. The data is modestly negative for Indian assets, including INR (the rupee), bonds and equities," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

The most-traded 7.80 percent 2021 bond yield rose 2 basis points to 8.26 percent after the data. The five-year overnight indexed swap rate rose 4 basis points to 8.15 percent, and the one-year was 3 basis points higher at 8.05 percent after the data, dealers said.

The main share index extended losses to about 1 percent.

Fresh from victories in a handful of state elections, the Congress-led ruling coalition does not face polls until early next year, giving it a window for raising fuel prices in order to offset the government's subsidy burden.

But increasing prices for diesel and other fuels may not go down well with populist government allies, including the Trinamool Congress, its most powerful partner, which won the state election in West Bengal last week.

Supporters of the main opposition Bharatiya Janata Party blocked roads and rail tracks to protest the petrol price hike over the weekend, demonstrations that may intensify as the government nears a decision on diesel prices.

The food price index, which contributes just over 14 percent in the wholesale price index, rose 8.71 percent and the fuel price index climbed 13.32 percent in April, data showed.

The manufacturing sector, which contributes around 64 percent to the Wholesale Price Index (WPI), saw 6.18 percent inflation in April, compared with 6.21 percent in the previous month.

Further pressure?

"The revisions are coming at around 100 basis points, so most likely this (April WPI) will come close to double digits," said Sujan Hajra, chief economist at Anand Rathi Financial Services in Mumbai. "Inflationary pressures are not abating and on top of that we expect diesel prices up 2-3 rupees."

The government may raise diesel prices by 3-4 rupees a litre as early as this month, and there are proposals to lift prices of kerosene and cooking gas, a government source said.

State-run oil refiners raised petrol prices by about 8.6 percent, or 5 rupees a litre ($0.11), from Sunday, a record increase that will fuel inflation in Asia's third-largest economy.

"I see inflation coming down a little bit next month without fuel price increases factored in and the moment you add in the domestic fuel price increases it will go up by 100 to 150 basis points provided diesel and LPG prices are raised," said Saugata Bhattacharya, an economist at Axis Bank at Mumbai.

India is not alone in facing up to the reality that gross domestic product growth is likely to be dented in the battle against inflationary pressures that have been building in Asia as the region leads the global recovery.

Most major economies in Asia have tightened monetary policy to contain price pressures that have built up during a strong recovery from the global crisis.

China raised the reserve requirements for its banks last Thursday for the fifth time this year to restrain prices as consumer price inflation remained above expectations at 5.3 percent in April.