The Reserve Bank of India, will hold its mid-quarter review of monetary policy on Friday, amid hopes that the central bank will not disappoint this time.
RBI, which has raised interest rate 13 times since March, 2010 to tame inflation, may change the tight monetary stance as the industrial production has turned negative in October recording a fall of 5.1%.
Finance minister Pranab Mukherjee acknowledged that interest rates had started affecting investments.
"The struggle against inflation and the tightening interest rate regime has contributed to lowering of growth in demand and investment. The slowdown in industrial growth is of particular concern as it impacts employment," the finance minister said, but added that inflation was still at "unacceptable" levels.
The RBI in its mid-year policy in October had indicated that it might halt rise in interest rate if the inflationary situation does not worsen.
"With growth slowing more than expected and likelihood that headline inflation could cool to 7% by March, the central bank is likely to build in a dovish rhetoric in its monetary stance, leaving door open for a possible CRR cut in January and a repo rate cut in first quarter of FY13," said Abheek Barua, chief economist at HDFC Bank.
The bigger worry on the economic at this time is to arrest falling growth.
"Domestically, the struggle against inflation and tightening interest rate regime has contributed to lowering of growth in demand and investment. The slowdown in industrial growth is of particular concern as it impacts employment," finance minister Pranab Mukherjee said in New Delhi.
State Bank of India Chairman Pratip Chaudhuri had said yesterday the he did not expect the RBI to hike interest rate in its next policy.
"I don't think so because food inflation has come down significantly and steadily. RBI has said 7% is the level they are targeting", he told the reporters.
Besides, other experts and economists too are of opinion that RBI would pause hike in interest rate because of economic slowdown and decline in rate of price rise.
The markets were uneasy on Thursday with selling seen in interest rate sensitive stocks such as banking and auto. The 30-scrip sensitive index of the Bombay Stock Exchange which fell over 284 points intra-day pared losses to close on a dull note.
Another major worry for the RBI in the short-term is the sharp depreciation in the rupee. The Indian currency hit another new low on Thursday at 54.30 a dollar. It has been consistently falling to new lows for the past four days and has lost over 20% to the dollar in just four months.
A falling rupee makes imports costlier, especially those of petroleum products, putting pressure on oil marketing companies to raise prices of de-regulated fuels like petrol. While the government would fend off an increase in diesel, kerosene and cooking gas, it can do so only for a limited time.
All this will add to inflationary pressures again.
"The RBI should reduce interest rates to gradually reverse the impact of the 13 interest rate hikes it has undertaken over the last two years," said Chandrajit Banerjee, director general of Confederation of Indian Industry (CII).
"RBI should also implement measures to contain the sharp decline in the value of the rupee as this would exacerbate inflationary pressures and take away any gains from the moderation in global commodity prices," Banerjee added.
(With inputs from IANS)