NEW DELHI: The government's move to allow hike in fuel prices is expected to add 120 basis points to inflation, which is likely to be in the 7-7.5 per cent range in the March quarter, a Bank of America-Merrill Lynch report said.
"Inflation will follow an inverted U curve in FY14," BoA-ML India economist Indranil Sen Gupta said in a report.
In order to revive economic situation of the country, the government on Thursday decided to deregulate diesel rates when it raised prices by 50 paisa per litre and planned similar monthly hikes in future to cut record subsidies.
As per the report, inflation would persist around 7 per cent in the March quarter, then likely go back up to 7.5-8 per cent in the second half of 2013. It would then abate to 6.5-7 per cent by March 2014.
The report further noted that RBI is likely to cut rates by 75 basis points by June.
The major factors that can influence Inflation in India include Delhi's political ability to hike diesel prices, oil prices and monsoons, it added.
The inflation has not declined to the expected levels despite tight monetary stance pursued by the RBI to check the rate of price rise.