India's decision to raise diesel prices by 14% is larger than expected, and will directly add 65-bp to headline WPI inflation, says a Credit Suisse note. Some second-round price effects are also likely, and given the weakness in the economy these may be particularly significant. "While it is tempting to think that the ensuing addition to inflation will further discourage the RBI from cutting rates, the central bank has been pushing very hard for just such an increase as a means to tackle the ever-mounting fiscal subsidy bill," it says. Hence, it would be very odd for the RBI to respond to the move by suggesting that rate cuts were now less likely. In fact, "the move should be considered as a necessary, but not sufficient condition for RBI to re-start its rate cuts." Credit Suisse notes that two of the big three rating agencies have India on negative watch for downgrade to junk.
"Again, we doubt that last night's move is enough in itself to prevent this occurring."
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