MUMBAI Dec 18 India's central bank is expected
to keep interest rates on hold on Tuesday despite government
pressure for a cut, sticking to its guidance that it will not
ease monetary policy before early next year as cooling inflation
is still too high for comfort.
The Reserve Bank of India (RBI) has kept its key borrowing
rate at 8 percent since April, defying calls from business and
politicians to do more to cushion the economy from a downturn
that has dragged it towards its slowest growth rate in a decade.
Despite signs that price pressures are moderating, the RBI
is expected to wait for more clarity on the inflation trajectory
before resuming rate cuts, in contrast to other big emerging
market central banks in China, Brazil and South Korea that have
been more aggressive in easing policy to stimulate growth.
Instead, the central bank may deliver a cut in the cash
reserve ratio (CRR), a tool it has been using to manage a cash
deficit and prod banks to loosen lending rates.
"They might want to lag behind rather than do a rate cut now
on expectation of softer inflation," said Siddhartha Sanyal,
India economist at Barclays Capital in Mumbai.
"If they cut rates now then lot of open questions will arise
because they had revised their inflation trajectory upwards as
late as in October. That will hurt their credibility."
The wholesale price index, India's main gauge for inflation,
has remained above 7 percent for the past three years, a key
reason why the RBI has refrained from lowering policy rates
since April's 50-basis point cut.
In doing so, the central bank has repeatedly resisted
pressure from the finance ministry to cut rates to prop up an
economy that has posted GDP growth below 6 percent for the past
three quarters and is on track for its weakest annual
performance in a decade in the fiscal year ending March.
A Reuters poll last week showed 37 of 41 expect the RBI to
hold the policy repo rate at 8 percent at its
mid-quarter monetary policy review.
Respondents were split over a cut in the CRR,
with 16 of 33 expecting the RBI to reduce the ratio of deposits
that lenders must keep with the central bank by 25 or 50 basis
RBI Governor Duvvuri Subbarao had raised the inflation
projection in October to 7.5 percent for the fiscal year from 7
percent, and in unusually explicit guidance said there was
"reasonable likelihood" of further policy easing in the March
Headline inflation, which data on Friday showed
eased unexpectedly to a 10-month low of 7.24 percent in November
from a year earlier, is expected to rise close to 8 percent in
December and subsequently cool from January.
"There is always a justification of cutting rates now
because we all know the trajectory of growth and inflation. But
the RBI may not want to be seen as cutting rates when inflation
will go up before dipping," said Saugata Bhattacharya, chief
economist at Axis Bank.
However, November's slower-than-estimated inflation raised
some expectations of a rate cut as early as Tuesday.
"With inflation prints for October and November coming lower
than its forecasts, there is a strong case for the RBI to act
sooner than its guidance," Goldman Sachs said in a research
note. The investment firm now expects the RBI to cut rates on
Tuesday compared with its previous views of no rate cut.
Federal bonds that follow the central bank's policy moves
closely would rally, with the 10-year benchmark bond
yield expected to soften by around 10 basis
points if the RBI cuts the repo rate.
India's benchmark BSE stock index has fallen in six
out of the previous seven sessions amid caution ahead of the RBI
The Congress-led minority government, faced with threats of
sovereign rating downgrades due to a widening fiscal deficit, is
struggling to pass key reform bills allowing greater access to
foreign investors in the retail, banking and insurance sectors.
Standard & Poor's last week issued another warning to
India's credit rating, saying a wide fiscal deficit and a heavy
debt burden were the most significant rating constraints.
India's fiscal deficit is the widest among major emerging
nations due to high subsidies on fuel, food and fertilisers. The
government aims to bring down the fiscal deficit to 5.3 percent
of GDP in 2012/13 from 5.8 percent in 2011/12, but most analysts
consider this a tall order given a slowdown in revenues.
(Editing by Alex Richardson)