Government of India has taken several harsh, long-delayed steps over the last two days to improve investor confidence, but the Reserve Bank of India (RBI) is still unlikely to cut rates due to persistent inflation.
Taking a firm stance, the union government opened its retail sector and airlines to foreign direct investment, hiked the price of subsidised diesel, and announced its plans to sell some of its stakes in four public sector units (PSUs) to tackle widening fiscal deficit and further credit rating downgrades by international agencies.
However, analysts are of the view that the moves would not prompt the central bank to cut its key rates to provide a boost to the struggling economy, mainly due to high inflation. The recent hike in the price of diesel will further aggravate inflation. Moreover, the recent measures will not show impact immediately.
Samiran Chakraborty, an economist with the Standard Chartered Bank, said, "But I don't think the RBI will cut rates after these measures because the impact of these steps on the supply side will only be in the medium term."
Speaking on the topic, Chakraborty, however, added that the measures would improve business and consumer sentiment as an immediate impact.
The RBI has held borrowing costs steady since April, when it slashed key rates by 50 basis points. The central bank has repeatedly called on the union government to play its part by hacking the widening fiscal deficit.