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Despite diesel price rise, economists unsure of RBI's Monday response

Many feel it might not rush to cut rates

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Parnika Sokhi Mumbai
Last Updated : Jan 24 2013 | 2:10 AM IST

The rise in diesel prices three days ahead of its scheduled mid-quarter review of monetary policy will put pressure on the the Reserve Bank of India to cut interest rates for boosting demand. However, say economists, the central bank is unlikely to respond in a hurry.

“It is too early for RBI to react to the revision. This is not the only measure required to bring the fiscal house in order; there are also issues on the revenue side,” said A Prasanna, chief economist at ICICI Securities Primary Dealership.

However, the chances of a rate cut in the half-yearly review on October 31 look brighter, he added. On Monday, RBI is slated to announce the mid-quarter policy review.

on Thursday, the government announced a rise in diesel prices by Rs 5 per litre and capped the number of subsidised cooking gas cylinders to six per family. “It is a very strong and positive move but one needs to understand how the government builds up on this,” said Shubhada Rao, chief economist, YES Bank. She expects RBI to maintain status quo in Monday’s review.

RBI has been emphasising the importance of a fuel price rise in recent policy reviews. In an earlier post-policy interaction with analysts,

Governor D Subbarao said the rate cut of 50 basis points announced in April was based on the expectation of some action following from the government side, that had not happened. The central bank had deferred a policy rate cut in the following reviews held in June and July.

RBI had said if the target of restricting the expenditure on subsidies to under two per cent of gross domestic product was to be achieved, immediate action on fuel and fertiliser subsidies was required.

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Economists said the government had perhaps taken too long to address the issue. “Taking this step when almost half of the financial year is through may not make a big dent in the subsidies,” said Prasanna.

Inflation
on Thursday’s rise will have an upward impact on inflation, making it more difficult for the RBI to loosen its stance. The central bank has been of the view that a fuel price revision might have a short-term negative impact but in the long term, it will augur well for fiscal health. Also, RBI’s projection of year-end inflation takes into account the impact of a fuel price revision.

“With the adjustment of domestic prices of petroleum products to international price changes still incomplete, embedded risks of suppressed inflation could also impact fuel prices,” said RBI in the first-quarter review of monetary policy. It had then raised the Wholesale Price Index (WPI) projection for March 2013, from 6.5 per cent to seven per cent.

Said Madan Sabnavis of rating agency Icra: “The hike, though necessary for fiscal prudence, will lead to an increase in WPI by 1-1.5 per cent. Given RBI’s goal is to see inflation come down, ideally it should not be cutting rates. But given the fact that the price hike has come a few days before the policy (review), I won’t be surprised if RBI cuts rates.”

Economists also said on Thursday’s move might not be substantial if there is quantitative easing elsewhere that would result in the shooting up of international oil prices. The yields on government bonds might fall on hopes that the step provides room for monetary easing. on Thursday, yields on the 10-year benchmark government bond closed at 8.17 per cent. The rupee is also expected to react by appreciating from on Thursday’s level of 55.43 against the dollar.

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First Published: Sep 14 2012 | 12:11 AM IST

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