The recent fuel price rise will add to India's inflation worries and tax cuts are seen negating its positive impact on the fiscal deficit

India raised diesel prices about 9 percent on Friday after months of delay and also cut customs duty on crude and petrol products and reduced excise duty on diesel, which will result in a total revenue loss to the government of about 490 billion rupees this year.
Economists continue to see The Reserve Bank of India (RBI) lifting its key lending rate further to tame high inflation.
Goldman Sachs increased its inflation forecast for 2011-12 to 8.6 percent from 8.1 percent previously after the fuel price rise, and expects the RBI to raise rates by 50 basis points over the next three months.
"We estimate the direct impact on headline inflation of the June 24 increase to be 0.6 percentage point (ppt), and an overall impact of 0.9 ppt for FY12," analysts Tushar Poddar and Vishal Vaibhaw wrote.
"We estimate the fiscal deficit in FY12 may increase a notch to 5.5 percent of GDP from our earlier estimate of 5.4 percent."
Goldman Sachs said that the tax cuts would negate the savings from lower subsidies to oil companies.
The wholesale price index, India's main inflation gauge, rose an annual 9.06 percent in May, above the median forecast for an 8.70 percent rise in a Reuters poll and the April figure of 8.66 percent.
Barclays Capital expects a 70 basis point immediate and direct impact of the fuel price rise on the headline inflation.
"Factoring in a subsequent indirect effect of the diesel price hike, we think the overall impact on the headline inflation rate could be 110 basis points in the next 3-4 months," Barclays analysts Siddhartha Sanyal and Kumar Rachapudi said in a note.
It maintained its expectation of another 25 basis point rate rise by the RBI in July-September and a pause thereafter.
Credit Suisse said the the fuel price rise was in line with its expectations and will add 0.6-0.7 percentage points to the wholesale price index.
"At this stage, we are not making any change either to our above consensus WPI forecast, which we expect to average 8 percent in 2011-12 (falling to 6 percent by March 2012), or our central government fiscal deficit projection of 5.4 percent of GDP," it said in a note.
The risks to both inflation and fiscal deficit are on the upside, it added.