India on course to cut rates this week

Expected interest rate reduction in response to economic reforms and lower inflation

PUBLISHED : Monday, 28 January, 2013, 12:00am
UPDATED : Monday, 28 January, 2013, 4:39am


India's central bank is expected to cut interest rates this week for the first time in nine months in response to the government's recent economic reforms and slowing inflation, economists say.

With inflation at a three-year low and a flurry of new measures to ease investment rules, now is seen as the right time for the bank to focus on pulling the economy out of its worst growth slump in a decade.

Policymakers are "clearly teed up for rate cuts," banking on a further easing of inflation in coming quarters, lower government borrowing and more pro-market reforms, said HSBC economist Leif Eskesen.

However, those hoping the Reserve Bank of India will announce a big cut following its policy-setting meeting tomorrow are likely to be disappointed.

The bank "is likely to tread very carefully - given lingering inflation risks," Eskesen added.

Like other economists, he said he expected the bank to limit any rate cut to 25 basis points. The bank's key repo rate - at which it lends to commercial banks - now stands at 8.0 per cent.

Any reduction would be welcomed by Prime Minister Manmohan Singh's scandal-scarred Congress party government, which is anxious to revive growth before facing voters in elections due in the first half of next year.

Indian shares have been nosing higher to trade at around two-year highs in the past week on hopes of lower rates.

"The market is betting on a rate cut of 25 basis points," said Madan Sabnavis, chief economist at Care Ratings.

Countries such as China, South Korea and Brazil have all cut rates to try to shield their economies from the spillover of the euro-zone debt crisis.

But India's central bank - which last cut rates in April after an aggressive multi-year rate-hiking spree - has resisted the clamour from business leaders and politicians for lower borrowing costs to spur the economy.

Growth fell to 5.3 per cent in the third quarter while industrial output shrank by 0.1 per cent in November from a year ago.