Will the RBI tango with govt on Monday?

Though the government surprised people by biting not just one reform bullet but many in just 48 hours over the weekend, the question now is: Will the RBI governor walk the much-needed monetary extra-mile on Monday or will be weighed down by the 68 bps spike in August inflation?

Also Read: RBI will continue to target inflation: CNBC-TV18 poll

The Reserve Bank will announce the mid-quarter monetary policy review on Monday morning, where everybody would expect governor Duvvuri Subbarao to join the party and slash the lending rate, but for the inflation phantom that has raised its venomous fangs yet again.

Ironically, the flurry of events last week with diesel price hike and the third round of monetary easing have only compounded problems for Subbarao, who has been both blamed and credited in equal measure for his inflation phobia over the past 30 months or so.

Already the US and ECB actions had their immediate impacts on inflation as the commodity prices rose instantly across the globe. Gold hit a new high, metals are on a song and the most crucial crude rose nearly 1.5% post the Fed announcement to buy USD 40 billion of US government bonds every month till the end of 2015.

Domestically, the impact of the rising crude will negate the positive impact on fiscal deficit which the 12 per cent diesel price hike would have brought.

According to analysts, the diesel price hike will lead to an overall 100 basis points increase in inflation. Considering these two, the governor, they say will probably wait for some more time to cut rates.

To top it all, analysts have already discounted the government decision to effect a steep 12% hike in diesel price last Thursday, and a Rs 5.70 reduction in excise duty on petrol would be negated by the rise in crude prices.

This means that there will be little impact on the oil subsidy, though the government claimed that the same would come down by Rs 20,300 crore this fiscal.