(This story originally appeared in on Sep 21, 2012)

MUMBAI: Reliance Communications , the country's second-largest mobile operator by subscribers, will raise calling rates by 25% from Friday to improve its operating margins, possibly setting the stage for all leading mobile phone companies to go in for a second round of tariff hikes in the last 12 months.

This will be the biggest tariff hike effected by the Anil Ambani company and will be the second bold step undertaken by the debt-ridden telco after it disconnected subscribers who had not used their phones for two months. This resulted in a 21-million decline in its subscriber base. RCOM 's revised call rates will initially affect new customers and will be extended to its existing users when the validity of their current tariff plans expire. The company said it has revised its base price from 1.2 paise per second to 1.5 paise and this has initially been implemented in four states and be rolled out across the rest of the county within a month.

The company said its move comes in the wake of its new strategy to track average margin per user rather than average monthly revenue per user.

While Reliance Communications' leading rivals such as Bharti Airtel and Vodafone did not immediately comment on how they would respond to the tariff hike, traditionally, such a move by a leading operator has been followed by similar moves by competitors. "We can expect further increase in rates going forward, since, competitive intensity has tapered," said Gurdeep Singh, CEO of the company's wireless division.

Singh said the full revenue impact of the tariff hike will be shown in the next financial year, as nearly 8-9% of the user base's validity expires every month. In mid-2011, all mobile phone companies began raising tariffs by about 20%, the first call rate hike after three years of savage price cuts. This process was done in a phased manner and was completed only in March.

Recently Idea Cellular raised tariffs by 15-20% in Madhya Pradesh and is slated to extend this to the rest of the country, as the industry tries to enforce price discipline and put the cut-throat competition of 2008-11 firmly behind it. However, Bharti and Vodafone have maintained that such increase in rates typically do not improve revenue because they are offset by sporadic offers on other plans.

The mobile boom of the past decade is primarily attributed to the sharp and continuous fall in call rates. Reliance Communications said it had studied the market and higher call rates were unlikely to reduce customer demand. This reaffirms analysts' reports of the last six months that have suggested that a marginal change in tariff is unlikely to affect demand in the current market.

An analyst, who asked not to be named, said the price hike will have no impact on Reliance Communications' fortunes this quarter. "It will have to be seen in March whether there is any revenue upside and how much customer attrition is caused by this," he said. An industry official said the rate increase would result in 7-8% rise in revenue by the time its full impact is realised. About 35% of the incremental revenue would flow to operating profit, he added.

Another analyst said RCOM needs moves like this to improve cash flow, but with the competitive offers being made by rivals like Bharti, they may lose customers because of this.