Fuel tax hike unlikely to stop RBI from cutting rates

India’s decision to raise duties on gasoline and diesel is unlikely to threaten the inflation outlook, keeping alive expectations of more interest rate cuts from the central bank.

Finance minister Nirmala Sitharaman’s decision on Friday to increase federal taxes on transport fuels by ₹2 a litre will have an impact of less than 10 basis points on headline inflation, according to Teresa John, an economist at Nirmal Bang Equities Pvt The second-round effects could push up the inflation rate by slightly more than 10 basis points as higher transport costs spread to other parts of the economy.

“The decision doesn’t really move the needle much for inflation,” said John, who sees the first-round impact at 6-7 basis points. “Average headline inflation would be around 3.8-3.9% for FY20.”