As announced, when the government raises prices of diesel and other fuel based products in order to protect the exchequer from setting aside additional amount for subsidies, the flip side is that it will leading to a higher fiscal deficit.
Based on the tone of its latest document -- Macroeconomic and Monetary Developments in 2010-11 -- analysts are equally divided. While some analysts' suggest a deeper 50 basis points hike is on the cards, other analysts' are of the view that given the RBI's aversion to sudden spikes, it may raise only 25 basis points.
In its latest document RBI said, “Persistence of high inflation warrants continuation of anti-inflationary monetary stance to sustain the growth momentum over the medium term." A hike in administered fuel and fertiliser prices and a quick deregulation of diesel prices will help provide fiscal space, it said.
The Reserve Bank of India's 2011-2012 annual monetary policy review due today at 11:30 a.m. will be closely watched and will also tell us which side got the forecast right.