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India fuel price freeze eases inflation pressure, boosts Modi election hopes -observers

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Workers pump fuel at a petrol station in Ahmedabad
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By Manoj Kumar and Nidhi Verma

NEW DELHI (Reuters) - A fuel price freeze by India's oil companies as the global crude market surges could dampen inflationary pressures enough to delay an interest rate hike, and might generate significant electoral gains for Prime Minster Narendra Modi, observers said.

Indian fuel retailers revised prices daily through much of last year but, despite the oil market hitting a seven-year high, have held them unchanged since early November as well as cutting gasoline and gasoil taxes.

The government and fuel company officials say they want to protect consumers in the world's third biggest oil importer "from volatile global oil and refined fuel prices".

The measure - not subject to a written government order but nevertheless hurting the oil companies' profits, senior officials speaking on condition of anonymity said - also coincides with the run-up to key elections.

Modi's Bharatiya Janata Party (BJP) is facing voter anger over accelating inflation and job losses suffered during the COVID-19 pandemic ahead of five state ballots next month.

How the BJP performs in those elections - notably in Uttar Pradesh, India's most populous state - will provide a litmus test of Modi's chances of retaining power in national elections in 2024.

"The ruling party gets a clear political advantage as the holding off daily oil price revisions has lowered voters' anger," said Anurag Agarwal, a sports goods manufacturer from Meerut in Uttar Pradesh, and a regional head of the Indian Industries Association.

Rahul Mehta, president of the Tourism Welfare Association trade body in Varanasi - in the same state and Modi's political constituency - meanwhile called the fuel price freeze an "election bonanza" for citizens.

The main opposition Congress Party has also accused Modi of "politicising" the price of fuel by failing to pass on in full to consumers a fall in crude oil prices last year.

APRIL RATE HIKE?

The fuel price freeze, mirrored by many manufacturing firms battling to counter a COVID-induced slump in consumer demand, has also all but put the lid on chances of a February interest rate hike.

The Reserve Bank of India's monetary policy committee meets from Feb 7-9, but economists, many of whom had previously forecast policy action then, now generally expect no change until a repo rate rise in the April-June period as an economic recovery gains momentum.

Aditi Nayar, chief economist at rating agency ICRA, the Indian arm of Moody's, said it expected the RBI to "delay the normalisation of the monetary stance" from February to April.

Deferring fuel price hikes and the parallel delays by manufacturing firms had "temporarily insulated" Indian households against inflation, she said.

The Tourism Welfare Association's Mehta said Varanasi was praying that "international oil prices come down after elections and the oil companies would not need to increase prices."

Many economists predict price revisions will take place in March, and that could stoke inflation and dent the economic recovery.

Amish Shah, an analyst at Bank of America, forecast energy and manufacturing price hikes could boost average annual retail inflation to 5.8% in the fiscal year starting in April, from a five-month high of 5.59% in December.

Economists have also raised forecasts for wholesale price inflation - majorly impacted by global crude oil and commodity prices - to 12% from around 11.5% for the quarter ending in March.

WPI, a proxy for producer prices, eased marginally in December to 13.56% but remained in double digits for a ninth successive month.

(Additional reporting by Saurabh Sharma in LUCKNOW; editing by John Stonestreet)

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