* Shares in state refiners up after gasoline price rise * India may soon lift diesel prices by 2 rupees per litre * Central bank expected to keep rates steady on Thursday * Diesel increase would have broader inflationary impact (Updates with details, quotes) By Tony Munroe MUMBAI, Dec 15 (Reuters) - Moves by Indian oil firms to raise petrol prices and possible hikes in diesel fuel will make the central bank's fight against inflation more difficult and pile more pressure onto the beleaguered government. Bharat Petroleum raised prices by about 5.6 percent on Wednesday and fellow state operators Hindustan Petroleum and Indian Oil Corp were expected to make similar moves by Thursday. Prime Minister Manmohan Singh's government is under attack from the opposition for a slew of corruption scandals, which all but paralysed the parliamentary session that ended this week. While India is keen to ease its subsidy burden, lifting fuel prices in a country where hundreds of millions live in poverty could anger the governing Congress party's core voter base. "When the price of fuel goes up, everything goes up. If the diesel rise happens, the general price rises across all goods could have a big impact for Congress in 2011," said Mahesh Rangarajan, a political columnist and professor at Delhi University. Congress suffered a drubbing in elections last month in Bihar, but does not face another state election until May 2011. "They certainly waited until the day after the parliament session ended as this would have further unified the opposition," Rangarajan said. Inflation has been moderating somewhat in recent months but remains high, a problem the Reserve Bank of India will wrestle with as it meets this week to review monetary policy. While it is widely expected to refrain from raising interest rates this time after six increases since March, rising energy and other commodity prices make its target of cutting headline inflation to about 5.5 percent by the end of March harder to achieve. Gasoline and diesel have weights of 1.09 percent and 4.67 percent, respectively, in the wholesale price index (WPI), India's main inflation measure, and raising fuel prices has a knock-on effect as farmers and manufacturers pass costs along. The increase in petrol prices and a 2 rupee rise in diesel would lift WPI inflation by 6 and 24 basis points, respectively, with a cascading effect of the same degree over three or four months, Morgan Stanley economist Chetan Ahya wrote. "We view these fuel price hikes (petrol and diesel) as positive from an overall structural reform perspective in government's effort towards reduction in subsidies," he wrote. The government is expected to make a decision on state-set diesel prices next week, with a 2 rupees per litre increase foreseen by industry sources. Wholesale price inflation fell to 7.48 percent in November, its lowest in a year, data showed on Tuesday. [ID:nSGE6BC09D] But the fuel price increase put the spotlight back on inflation in India's financial markets on Wednesday. Federal bond yields and swap rates nudged higher, taking their cue from a drop in U.S. Treasury prices and the prospect of higher fuel prices. At 2:43 p.m. (0913 GMT), the most benchmark 10-year bond yield was up 1 basis point at 8.10 percent. A Reuters poll conducted late on Tuesday showed just one in 23 analysts expect the Reserve Bank of India (RBI) to raise rates this week, while 14 of 22 see at least a 25 basis point rate increase by the end of the fiscal year in March. [ID:nBMA009130] "If RBI pauses tomorrow then they will have to take more aggressive actions in the future, especially post the fuel price hike," said Rupa Rege Nitsure, chief economist at Bank of Baroda and the lone poll participant to predict a rate rise this week. "Inflation is looking good of late only because of the statistical base effect," she said. STEEPEST SINCE JUNE The price rise would be the steepest since June when India freed up petrol prices from government control. The decision, which came along with a rise in prices of diesel and cooking fuels, sparked political and street protests against the Congress-led coalition government. [ID:nSGE6BE00K] "The parliament session is over and headline inflation is trending down and with crude still manageable at $90, I think the government thought it fit to hike petrol prices now. I won't be surprised if diesel prices are also hiked," said a finance ministry source who deals directly with energy and fiscal policy. "These decisions are as much economic as they are about political management," the person said. The Hindu nationalist opposition party, the Bharatiya Janata Party, demanded a rollback of the petrol price increase, calling it "totally unwarranted and unjustified," Press Trust of India reported, quoting party spokesman Prakash Javadekar. Shares in the three state refiners jumped more than 4 percent on news of the petrol price rises before paring some of the gains, outperforming a broader market that fell 0.8 percent. (Additional reporting by Nidhi Verma, Henry Foy, Abhijit Neogy, Swati Bhat and Neha D'silva; Editing by Neil Fullick & Kim Coghill)

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