The recent diesel price hike will add 120 basis points, or 1.20 per cent, to the already insistent inflation and the price index will remain high throughout the next financial year, according to an estimate by Bank of Amercia-Merrill Lynch (BofA-ML).

The government recently allowed oil marketing companies to hike the price of the fuel by 50 paise per litre per month and ended subsidy on bulk & institutional diesel consumers, such as railways, state road transport corps and power plants. Current, the government is providing a subsidy of Rs 9.50 on per litre of diesel.

Economists say that the hike in price of diesel, which is used to transport goods from one place to another, will add to inflation.

BofA-ML India chief economist Indranil Sen Gupta said, "The bottomline is that inflation will follow an inverted U in FY14, after last week's diesel price hikes that will add 120 bps to FY14 inflation."

As per the American brokerage's estimates, rate of inflation should persist around 7 per cent in the March quarter, and hike to 7.5-8 per cent in the second half of 2013. However, inflation will likely fall to 6.5-7 per cent by March next year.

Nevertheless, BofA-ML expects the Reserve Bank of India (RBI) to slash its policy rates by 25 bps in its upcoming policy review on January 29. Another cut of 75 bps in policy rate is expected by June.