Reserve Bank of India (RBI) governor D Subbarao is a cautious man but he may yet ignore high inflation by reducing the policy repo rate by 0.25 percentage points while presenting his monetary policy review next week, as concerns for growth overshadow price pressures.
In all likelihood, the governor, using a little walk and a lot of talk, may only go for a marginal rate cut this time and reduce rates by a larger quantum in May, said experts.
The RBI had reduced the repo rate - the rate at which banks borrow from the RBI - by 25 basis points or 0.25 percentage points in its policy review in January. It currently stands at 7.75%.
A high retail price inflation (10.91%) in February notwithstanding, a falling wholesale price index (WPI)-based inflation (6.62%) in January and a 5.2% fiscal deficit for 2012-13 is likely to provide some room for the RBI to get decisive on March 19.
The government has set a 4.8% fiscal deficit target for the next fiscal year and finance minister P Chidambaram had said in his Budget speech that the government would take all measures to adhere to the fiscal consolidation roadmap.
The industry, meanwhile, has been pitching for a rate cut to boost investment and prop-up growth. Economic growth at 5% in the current fiscal is expected to be the worst in a decade.
The RBI is likely to announce a 25 basis point (bps) rate cut as it is now important to provide a push to growth and even if central bank reduces rates now, it would take about two months for the system to absorb it," said DK Joshi, chief economist, Crisil.
Though factory output showed signs of recovery by growing at 2.4% in January, analysts said it was too early to say recovery was sustainable.
"The RBI may cut the repo rate by 25 bps in March and go for a larger rate cut by of about 50 bps in May," said Soumya Kanti Ghosh, senior fellow, ICRIER.
Abheek Barua, chief economist, HDFC Bank, said the RBI will be cautious with retail inflation being stubbornly high.