RBI may cut rates on respite from inflation

Economists expect a cut in the repo rate, or the rate at which banks borrow from RBI, in at least one of the two policy review meetings scheduled for the March-April period.

While headline inflation has shown signs of easing, it may increase again, as the high base effect wears out. Economists say the central bank may take the advantage of the window to reduce policy rates.

"With growth below the trend and moderating core inflation, the risk of an early rate action from RBI has increased.

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"However, oil prices can play spoilsport. Not only can these defer the first rate cut, these can also trim expectations of the quantum of rate cuts over the course of the year," said Samiran Chakraborty, head of India research at Standard Chartered Bank.

Headline inflation, measured by the wholesale price index, declined to 6.6 per cent in January from 7.5 per cent in December and 9.5 per cent in November.

Economists had said the fall was primarily on account of a high base effect.

RBI is slated to announce the mid-quarter policy review on March 15, a day before the presentation of the Union Budget 2012-13.

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Citigroup economist Rohini Malkani expects policy rate cuts to begin in April, given RBI may like to wait and watch the steps taken towards fiscal consolidation in the Budget.

 "It's worth noting that RBI has said the timing and quantum would be contingent on policy measures to induce investments and steps towards fiscal consolidation," said Malkani.

She expects inflation to be between 6.5 per cent and 7.8 per cent in the next few months.

In the third-quarter policy review last month, RBI had announced a cut of 50 basis points in the cash reserve ratio, citing tight liquidity pressures.

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However, no action was taken on the policy rate front.

Since October, the repo rate has stood at 8.5 per cent.

To clamp inflation and inflationary expectations, the central bank had increased the repo rate thirteen times since March 2010.

Only from the January 2012 policy review did the central bank's policy stance shift from one focused on containing inflation to one managing liquidity and mitigating risks to growth.

RBI had said it would continue to anchor medium-term inflation expectations on the basis of a 'credible' commitment to low and stable inflation.

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With inflation projection for end of current financial year at 6.7 per cent, Indranil Sengupta, India chief economist at Bank of America Merrill Lynch, expects a repo rate cut of 25 basis points in the policy announcements in March and April.

"There may be a mid-year rebound in inflation on higher prices of coal, oil and power," said Sengupta.

He does not expect any change in the CRR in the coming policy review.