Fuel price hike only after inflation cools: Rangarajan

India could decide to hike domestic fuel prices once inflation begins to soften because doing it now would risk pushing consumer prices higher, C Rangarajan, chairman of the prime minister's economic advisory council, said today.

Submitting fuel to full market pricing would bolster India's fiscal health because fuel accounts for a quarter of its estimated subsidy bill of Rs1,20,000 crore. It would also help state-run energy retailers such as Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd operate profitably, Rangarajan told Reuters in an interview.

"Perhaps the timing of the decision could coincide with the period when the overall inflation is showing some softening," he said.

A panel led by finance minister Pranab Mukherjee on Monday postponed a decision on reforming fuel pricing after two key ministers from small coalition partners failed to attend.

The government is seen biding its time until it gets a better sense of the strength of the oncoming summer monsoon, which could ease the impact of inflation on consumers already burdened by higher food bills.

Rangarajan, a former head of the Reserve Bank of India (RBI), said he expects the May headline inflation number to stay below the 10 per cent level and eventually ease to around 6 per cent by end-March 2011.

However, Rangarajan said only high and persistent inflation could provoke a change in the central bank's policy approach. "If there is some trend towards a decline in the inflation rate, even though the level remains high, then the Reserve Bank could take a slightly relaxed view and decide to take action only at the time of review," he said. India's industrial output rose much faster than expected at 17.6 per cent in April from a year earlier, data showed on Friday.

The data comes on the heels of an annual 8.6 per cent expansion in the economy in the quarter through March. The government expects the economy to grow 8.5 per cent in the current fiscal year that started on April 1, after growing 7.4 per cent last year. Some fear the euro zone crisis could put that projection at risk. "The manner in which it will be dealt with by the euro zone has implications for the Indian economy," he said.

"I believe the EU will take action, will provide the necessary support to the various countries."