RBI action: Toss-up between pause and 25 bps cut

Business

Will declining core inflation levels and sluggish growth trends prompt theReserve Bank of India to cut key repo rate by 0.25 per cent in its mid-quarter review on March 19?

Clearly there is space for monetary policy easing, analysts said. Reasons: Fiscal adjustment is underway with significant reduction in deficit with credible measures and assumptions; also borrowing numbers are realistic.

Although there is a case for 25 bps cut, analysts are not sure whether the RBI will cut the key repo rate."We think that it will be a toss-up between a pause and a 25bps cut," said a note from Deutsche Bank.

"Along with the improvement in the trade deficitlast month (from $19.9 billion in January to $14.9 billion in February), it is likely that the RBI could reciprocate the government's initiativesand deliver a 25 bps repo rate cut next Tuesday. This could be followed by another 25 bps cutat the annual monetary policy review in May and possibly one more policy cut by September," said HDFC Bank chief economist Abheek Barua.

Most global banking giants including HSBC, Standard Chartered, Citigroup, Barclays and Credit Suisse say the RBI is likely to slash the repo rate.

Citigroup India chief economist Rohini Malkani said: "We maintain our view of a modest 0.50 per cent easing in rates in 2013, with a 0.25 per cent cut on March 19."

"Though wholesale price-based inflation at 6.84 per cent in February was marginally higher than expected, we maintain our view of a 0.25 per cent reduction in the repo rate to 7.50 per cent next week," Standard Chartered economist Anubhuti Sahay said.

Crisil in a report said, "Core inflation an indicator of demand side pressures on prices fell below the 4.0 per cent mark for the first time in past 35 months, strengthening the case for a repo rate cut by the RBI on March 19."

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