The Reserve Bank of India (RBI) is expected to reward the
government next week for its efforts to reform the economy and bring its
finances under control by announcing its first cut in interest rates in nine
months.
India’s central bank has been growing in
confidence that the government, gripped by inertia for much of last year, is
finally doing its bit to lift an economy that has slumped to its slowest pace
of growth in a decade.
“The government has gone ahead with all
the promises it had made 3 to 4 months earlier. There have been pretty
substantial measures on the fiscal deficit front,” said Samiran Chakrabarty,
head of research at Standard Chartered Bank in Mumbai.
“To an extent, that will be comforting
for the RBI.”
Inflation is also heading in the right
direction as far as the central bank is concerned. Wholesale price inflation,
the main price gauge, fell to a three-year low of just over 7 percent in
December.
Since mid December, yields on 10-year Indian government bonds
have pulled back to 7.865 percent from above 8 percent in anticipation of a
rate cut. The slide marked the first time the yield had dropped below 8 percent
since early 2011.
However, the RBI remains cautious with
inflation around 7 percent. Last week, Governor Duvvuri Subbarao said inflation
remained too high, a comment that dashed financial market expectations for a
more aggressive rate cut of 50 basis points.
Most economists expect the RBI to cut its
policy repo rate by 25 basis points on Tuesday to 7.75 percent and follow it up
with a cumulative 75 bps of cuts by the end of September, a Reuters poll showed
last week.
“The RBI cannot be very aggressive in
rate cuts. Our view is that inflation is unlikely to fall sustainably below 7
percent. There are lot of suppressed inflationary pressures that will add to
it,” said Sonal Varma, India economist at Nomura in Mumbai.
The RBI last cut rates in April 2012 by
50 basis points but warned at the time there would be limited scope for further
cuts.
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