Will diesel price hike lead to rate cut?

http://economictimes.indiatimes.com/news/economy/policy/will-diesel-price-hike-lead-to-rate-cut/articleshow/16391845.cms

The government's move to raise diesel prices sharply may push up prices in the short-term but will pave the way for a possible easing of interest rates in the weeks ahead, economists said. 

The long awaited move is likely to help RBI breathe easy for now as it has been urging the government to get its finances in order. "The initial impact on inflation would be around 60 basis points (100 basis points equals one percentage point). The second round impact will be muted due to the current sluggish state of the economy," said D.K. Joshi, chief economist at credit ratings agency Crisil. 

He said the government move will ease the fiscal stress as well as tame inflationary expectations. Inflation has remained a key policy challenge for the government. Food inflation has remained in double-digits for a significant period. The moderation in inflation in July fuelled expectations that RBI would ease interest rates but the lack of progress on the fiscal side prompted the central bank to avoid any easing. 

The government will release the inflation data for August on Friday. Factory output data for July has been dismal and has barley shown any growth. The overall economy has also slowed, prompting calls from India Inc to cut rates to revive sentiment and boost growth. RBI is expected to review monetary policy next week. Growth slowed to 5.5% in the April-June quarter, while several economists estimate overall growth in 2012-13 to be below 6%. 

The government aims to rein in the fiscal deficit at 5.1% of GDP in 2012-13 but mounting subsidies and lack of progress on fiscal consolidation had made it difficult for the central bank to act on rates. RBI has consistently cautioned about the stubborn inflationary pressures and has said that taming inflation remains its top priority. 

"My back of the envelope calculation shows that the initial impact on inflation would be around 0.2 percentage points. The second round impact would be a little more," said Pronob Sen, principal adviser at the Planning Commission . "My personal opinion is that RBI should not cut interest rates rather they should ease liquidity." 

Indian industry stepped up the pressure to cut interest rates. "RBI should now think of cutting interest rates because the government has acted to control the fiscal deficit," said R V Kanoria, president of Ficci, an industry lobby group. 

Truckers said they would raise rental rates by at least 7-8% immediately. This is expected to push up prices of food items and vegetables, already ruling high due to strained supplies.