RBI seen cutting repo rate 25 bps as inflation slows

RBI

India's central bank, Reserve Bank of India, is expected to reduce its policy interest rate by 25 basis points in a policy review on Jan. 29, making its first cut in nine months on the back of slowing inflation and weak economic activity, economists polled by Reuters said.

Thirty of 40 economists surveyed said the Reserve Bank of India (RBI) is likely to lower its repo rate by 25 basis points to 7.75 percent.

Data released on Monday showing headline inflation slowed to its lowest level in three years, was seen giving the central bank leeway to focus on supporting growth that is set for its weakest expansion in a decade during the fiscal year that ends in March.

"The reason why the RBI can now cut rates is we are seeing some moderation in inflation, and it is likely to continue throughout 2013," said Gaurav Kapur, senior economist at Royal Bank of Scotland in Mumbai.

"They would use this available space to support growth."

The repo rate has been unchanged at 8.0 percent since April, putting India's interest rates among the highest among major economies.

While many central banks have pushed through monetary stimulus packages to beat a slowdown in the global economy, the RBI has stood its ground, citing high inflation and high fiscal and current account deficits.

New Delhi's decision on Thursday to give fuel retailers leeway to raise prices of heavily subsidised diesel could be inflationary, though it is also likely to improve the fiscal deficit, economists said.

India's economic growth, which once seemed poised to hit double-digits, has slumped to below 6 percent in the past three quarters, as sluggish government policy-making and the global slowdown stifled capital investment.

More rate cuts are expected in coming quarters. The median estimate of 29 respondents sees the repo rate at 7 percent by the end of September, lower than the 7.25 percent forecast in a December poll.

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