Reserve Bank of India is set to announce its fifth bi-monthly policy review on Tuesday but experts feel it may keep rates unchanged to meet inflation targets.
This would be a marked change in the central bank’s policy that had reduced the repo rate — the rate at which banks borrow from the central bank — by 50 basis points in the previous monetary policy review in September, citing comfortable ease in inflation.
“We expect RBI to pause given the 50 basis point cut last time. He should cut a final 25 basis points in February. We see little headroom to cut rates after this,” said Indranil Sen Gupta, India economist for DSP Merrill Lynch.
All 45 respondents surveyed by Reuters last week expected RBI to hold the repo rate -- the rate at which it lends to commercial banks -- at 6.75% as it seeks to further decrease consumer inflation targets.
The analysts are less certain about whether RBI governor Raghuram Rajan will cut the rate early in the new year as he aims to get annual consumer inflation to around 5% by March 2017 from its current target of 6%.
Analysts however see it as an ambitious target as a recent pay hike to government employees and potential food price shocks could easily push up consumer price inflation. The US Fed is also likely to raise rates in December for the first time in nearly a decade, affecting emerging markets like India.
“It is very difficult for inflation to sustain below 5 percent in India,” said A. Prasanna, an economist at ICICI Securities Primary Dealership Ltd.
Rajan has eased the repo rate by 125 basis points since January, as inflation has eased thanks in large measure to a prolonged slump in commodity prices. He delivered a strong 50 basis point cut in September when financial markets expected only a 25 basis point cut.