Economy Sep 14, 2012
The government finally bit the diesel bullet, raising the hackles of political parties other than the Congress and of course the common man, who will bare the brunt of the rising prices.
The government's move is aimed at allaying the analysts concern about a looming downgrade of the country's sovereign rating.
They have also been warning of a sharp increase in fiscal deficit figure from the budgeted 5.1 percent for 2012-13, if the fuel prices continued at the same level. It will also relieve the markets as investors have also been waiting for a reassuring move from the government on the fiscal front. Here's an edited summary of expert views from Reuters.
"It (diesel price increase) will send a strong signal to the Reserve Bank of India on the government's efforts at fiscal consolidation," said Mumbai-based Anubhuti Sahay, Economist, Standard Chartered Bank.
However, he does not think the move will translate into a rate cut in September. "...But today's measures will give the central bank room to cut rates in the near future," he said.
Manish Wadhawan, Managing Director and Head Of Rates, HSBC, in Mumbai said it is the first credible step towards fiscal consolidation that the government has taken.
"It also gives some hope for rate cut by the Reserve Bank of India," he said adding it is too early to talk of an impact on the rating agencies. "...But it will definitely be positive."
A. Prasanna, economist, ICICI Securities Primary Dealership Ltd, in Mumbai, also does not expect a rate cut in September.
"The first round impact (on WPI) of the diesel price hike will be 60 basis points, which will have full impact in October. We have to see impact of the LPG cylinder cap on WPI. I still think it is too early for a rate cut in September. But the chances for a rate cut in October have gone up," he said.
Shubhada Rao, Chief Economist, Yes Bank, in Mumbai said: "I would think that at least this demonstrated some courage, perhaps a small step. One would have been happier to see a much larger step, but I think the positive takeaway is, after a very, very long time the government has actually been able to take some measure without dithering."
She, however, hoped the government will not back track on this.
G. Chokkalingam, chief investment officer, Centrum Wealth Management expects the market to be enthused by the government's move on diesel prices. "It is a major positive for the markets. There would be more confidence now on other reform measures too," he said adding it is setting the stage for an 50 bps RBI rate cut on Monday.
Hailing the move Indranil Pan, Chief Economist, Kotak Mahindra Bank, in Mumbai, said, "But this is only the first step, and lot more needs to be done to bridge the fiscal gap. It is not clear by how much the government would be able to reduce its subsidy on LPG by restricting supply to six per year per consumer."
He expects the rise in diesel price to add about 25 basis point to headline inflation.
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