Financial services majors Citi and HSBC said the long awaited government decision to hike fuel prices is a positive step, although it will fan the already high inflation and may not prevent fiscal slippage.
On Thursday, the Government hiked diesel price by Rs 5.63 a litre and capped supply of subsidised LPG to 6 cylinders per household in a year.
"These measures, though overdue, are positive and if not rolled back due to political pressures would send a strong signal on government's willingness and ability to act," Citi said in a research report.
Echoing similar sentiments, HSBC Chief Economist for India & ASEAN Leif Lybecker Eskesen said, "The decision to hike fuel prices and reduce under recoveries of oil marketing companies was a positive step in the right direction and holds promise," but added, "it will actually add to inflation."
On the fiscal deficit side, the measures taken on Thursday, are likely to only "contain" and not "prevent" fiscal slippage, the HSBC report said.
While the price hike is positive and will reduce the under-recoveries (losses by oil companies) by about Rs 203 billion, but retail prices are still way below global prices.
If no changes are made in the current subsidy sharing mechanism, the government's share of losses would touch Rs 1,002 billion higher than Rs 835 billion in FY12.
Even factoring the fuel hikes in, HSBC believes the 2012/13 fiscal deficit would reach to 5.8 per cent (as against the 5.1 per cent deficit target).
Citi also maintains its view of the fiscal deficit coming in at 5.9 per cent of GDP as against the government's target of 5.1 per cent.
HSBC however believes that "the RBI is not going to be in the mood to cut and we expect it will remain on hold on Monday", as the August inflation numbers are higher-han-expected and core inflation still on the rise.
Inflation in the month of August jumped to 7.55 per cent from 6.87 per cent in July.
According to Citi "The fuel price hike does increase the probability of the RBI easing in its policy on Monday, especially if the govt takes steps later today/weekend on the FDI front."
RBI's mid-quarterly review of monetary policy is scheduled to be announced on September 17.