Forex: New round of fuel subsidy cuts in India to raise inflation – TD Securities

FXstreet.com (Barcelona) - While TD Securities analysts continue to forecast a repo rate cut to 7.75% from the RBI on January 29, the Indian government made an INR positive announcement as they have decided to start a new round of fuel subsidy cuts that are likely to bear positive implications for the rupee, but negative for inflation.

"Following a 14% hike in diesel prices in September, the government announced a further increase of INR0.5/litre per month in order to reduce losses made by Oil Marketing Companies (OMC's under recoveries)", wrote analyst Tim Davis. "While this is going to reduce the consolidated budget deficit and improve India's overall credit metrics (hence reducing the probabilities of a downgrade), we have estimated a negative impact on WPI measurable in approximately +0.1% Y/Y increase in March, +0.5% by year-end, and +0.5% by end of FY2012/13", Davis continued, not expecting this to have immediate impact on monetary policy, "as the measures are reducing the total amount of suppressed inflation in India and giving more certainty to future developments".