India finally took a politically tough decision and pushed through a much-watched reform on freeing up state subsidised petrol prices so that it will be market driven, and raised the prices of kerosene by Rs3 per litre, diesel by Rs 2 per litre and cooking gas by Rs 35 a cylinder. The price rises are higher than expected. While petrol is used by the middle class for transport vehicles, kerosene is used by the poor as cooking fuel. The Government finally bit the bullet and has been bold in wanting to reduce the fiscal deficit from the 5.5% forecast for the year to March 2011. This is despite knowing that inflation will rise further at a time when it has caused great discomfort to the authorities. We estimate the move today will add about 1.1% to inflation as it feeds through the system. In early June the Congress-led Government backed off the price rise decision on fears of a voter backlash in state elections due later in 2010 and 2011.

David Fuller's view Following last year's severe drought, which caused India's food price inflation to soar, the government would only be lifting subsidies on petrol and kerosene if it was confident of a good monsoon.

The rainy season outlook is favourable as you can see from this latest report issued today.


India's stock market (weekly & daily) has been ranging with a slight upward bias since last October, in line with a lengthy consolidation of last year's earlier gains. Currently, resistance is being encountered near the April highs and some additional reaction and consolidation appears likely, especially if Wall Street is also in retreat. However, if the Nifty Index can hold approximately half of its gains since the May reaction low during this pause, India should be among the upside leaders when global stock markets resume their upward bias against the background of low interest rates and Asian-led growth. A break beneath the May low near 4800 would be required to question this outlook.