The Reserve Bank is likely to cut key interest rates by 0.50%, to 7.5%, in the forthcoming monetary policy review on easing inflationary pressures, says a Credit Suisse research report.
Positive surprises in the recent WPI inflation data – both headline and core – and likely ebbing of inflationary pressures may prompt the central bank to cut key interest rate in its next policy meet, it said.
"Following a break of nine months, we expect the Reserve Bank to cut the repo rate at its January 29 meeting, probably by 50 basis (0.5%) points to 7.5%," it said.
According to the report: "The move would be best described as a belated pat on the government's back following its September reform announcements."
Going forward, the repo rate is likely to drop to 6.75% by July 2013, as the core and headline WPI inflation is likely to drop below 4% and 6% respectively by mid-2013, Credit Suisse Research Analyst Robert Prior-Wandesforde said in the research note.
Retail inflation, based on consumer price index (CPI), remained close to double digits at 9.90% in November, while, the WPI inflation in November stood at 7.24%.
Though these levels are much above the Reserve Bank's comfort zone of 5-5.5%, inflation is showing some signs of easing in recent months.
"We doubt that a January cut requires inflation to drop further from here," the report said.
On October 30, RBI had pointed out that "the baseline scenario suggests there is a reasonable likelihood of further easing in the January-March quarter of 2013".
In the mid-quarter monetary policy review on December 18, RBI kept key interest rates unchanged.
It left the short-term lending (repo) rate and the cash reserve ratio -- the amount of deposits banks have to park with RBI -- unchanged at 8% and 4.25%, respectively.