The government has decided to hike diesel prices by Rs 0.5 each month, for the next 18 months. This will lead to a Rs 9 increase in per litre diesel prices at the end of this period. This move is aimed at ending the under-recoveries of the oil marketing companies. With these price hikes, concerns over higher inflation levels have started looming. Planning Commission Deputy Chairman Montek Singh Ahluwalia is of the view that it should not be a problem. His argument is that while diesel prices may be higher, this would lead to less disposable income levels. And therefore leading to lower demand for other products - thereby reducing their prices. All this would help towards curbing inflation levels over the long term.

We do not buy Mr. Ahluwalia's argument given that diesel price hike would increase prices of nearly all commodities - including the essential ones whose demand cannot be easily lowered (food in particular). Given that the RBI monetary policy review is planned in the next few days, this statement seems to be an indirect message sent across