Diesel price hike could dash rate cut hopes

A widely expected reduction in key rates by the Reserve bank of India (RBI) in its April policy meeting is seen getting pushed back by a few months if the government decides to go ahead with a diesel price hike in the next few days.

Blame it on the familiar scourge — inflation.

If the diesel price is hiked by Rs3 per litre, headline inflation, or inflation based on the wholesale price index (WPI), could move up 20-55 basis points, according to a poll of economists by DNA.

If the government were to effect a hike of Rs5 per litre, inflation could climb 35-100 bps, the poll showed.

Headline inflation has moderated over the last two months, falling to 6.55% in January and 6.95% in February, after having hit 10% as recently as September.

Fuel and power command a weightage of about 14.91% in the index.

RBI has taken a wait-and-watch approach since October, when it announced the last repo rate hike. While it has moved away from the aggressive anti-inflationary stance and admitted that growth is turning into a concern, the apex bank has not cut lending rates.

“RBI may continue in the pause mode for some more time before cutting rates. This is because consumer price index-based inflation came in on the higher side in February (at 8.83% compared with 7.56% in January). Iran’s escalating tensions will also put pressure on prices of fuel and WPI will continue to be in the uncomfortable zone,” said Madan Sabnavis, chief economist, CARE Ratings.

Sabnavis now expects a rate cut only in the June monetary policy.

Ramya Suryanarayanan, economist with DBS Bank in Singapore, also believes a rate cut is sometime away.

“Fiscal consolidation is not significant to trim down rates much. RBI will wait to assess the impact of fuel price hike and excise duty hike before cutting the repo rate,” she said.

The budget pegged the government’s share of petroleum subsidy at only `43,737 crore for the next fiscal, which would be insufficient if Brent crude stays at current levels (around $123/bbl on Thursday). In fact, in its post-budget analysis, Angel Broking had estimated the government’s share of subsidy for this fiscal at `68,533 crore, significantly above the government’s target of `23,696 crore.

Hence the need for a hike in diesel and LPG cylinder prices, feel economists.