Oil price hike an achievement but will fuel inflation

The Reserve Bank today termed the government decision to hike diesel prices a "significant achievement", but said the move will put pressure on inflation in the short term.

"While the recent upward revision in diesel prices and rationalisation of subsidy for LPG is a significant achievement, in the short-term, there will be pressures on headline inflation," RBI Governor D Subbarao said.

The government had last week hiked diesel prices by Rs 5.63 a litre and capped the number of subsidised LPG cylinders to six per family a year.

In RBI's mid-quarterly policy review, Subbarao said, "Over the medium-term, it (government move) will strengthen macroeconomic fundamentals".

RBI further said that over the longer run, subsidies should be brought down to below 2 per cent of GDP as indicated in the Budget to manage the demand side pressure on inflation.

"Containing inflationary pressures and lowering inflation expectations warrant maintaining the momentum of recent policy actions to step up investment, alleviate supply constraints, and improve productivity," Subbarao said.

The government has already taken a slew of reform measures including allowing FDI in multi-brand retail, and foreign carriers to pick up stake up to 49 per cent in aviation companies. Besides, it also cleared minority stake sale in four public sector companies.

Subbarao said, "Domestically, growth continues to be weak amidst a negative investment climate; however, the recent reform measures undertaken by the Government have started to reverse sentiments.

"Steps taken to increase foreign direct investment (FDI) should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain."