The hike in diesel price and cap on subsidised cooking gas cylinders may not be enough to persuade D Subbarao, governor of the Reserve Bank of India (RBI), in slashing the repo rate on Monday.
While Subbarao has been urging the government to act on subsidies before the central bank can start reducing rates, economists feel RBI will continue to wait for some more time to assess the inflationary trends in the economy.
Yesterday, the government announced 12% increase in diesel prices and capped subsidised cooking gas cylinders to six a year. RBI will release its mid-quarter review of monetary policy on Monday.
"While Thursday's decision opens up a bit of room for RBI to act on September 17, we expect the RBI to remain on a pause mode given the extreme hawkish rhetoric on inflation in the recent past. RBI is likely to wait and factor in the implications on domestic inflation out of QE3-driven rally in global commodity prices and the pass-through effects of high food prices (diesel price hike would also add to the pressure) on the inflation expectations in the economy," Indranil Pan, chief economist at Kotak Mahindra Bank, wrote in his note to clients today.
He, however, expects the communication in the monetary policy to tilt towards the dovish side, opening up the scope for a repo rate reduction on October 30. "We continue to expect repo rate cuts in the rest of 2012-13 to be restricted to 50 basis points," Pan said.
A similar view was expressed by Dhananjay Sinha, economist and strategist with Emkay Global Financial Services.
"It will be premature to expect rate cut on the back of fuel price hike in our view. While the fuel price hikes certainly implies attempts to curtain fuel subsidy, the impact is unlikely to ease the fiscal pressure much. In addition, the moderation in demand arising from reduction in fuel subsidy will be gradual. Hence, monetary easing now will have an immediate expansionary impact thereby amplifying the inflationary impact of fuel price hikes. Hence, we believe RBI will wait to see the impact of fuel price hikes to run its course before deciding to cut policy interest rates," he said.
Bank of America Merrill Lynch's India economist Indranil Sen Gupta believes while RBI may not cut the repo rate, it may reduce the cash reserve ratio by 25 basis points. "This (diesel price hike) supports our case for a 25 basis points CRR cut – if not a rate cut – in Monday's RBI policy," he said.