RBI may cut repo rate to two-year low in May: poll

RBI may cut repo rate to two-year low in May: poll

The Reserve Bank of India (RBI) is likely to cut interest rates next week for a third time this year, drawing comfort from a fall in inflation as it seeks to help lift the economy from its lowest growth in a decade, according to a Reuters poll.

Of the 42 analysts polled last week, 37 expect the RBI to cut the repo rate by 25 basis points to a two-year low of 7.25 per cent when it holds its policy review on May 3.

"They really want to provide support to economic activity," said Tuuli McCully, senior economist at Scotiabank.

The RBI is also likely to leave the cash reserve ratio (CRR) unchanged at 4 per cent on May 3, according to 26 of 38 economists. The CRR is at its lowest level since 1976.

The RBI has cut its benchmark rate by 25 basis points twice this year, having earlier resisted calls from industry and the government to ease monetary policy for much of 2012.

The latest poll's findings are in line with one taken in March.

India's headline inflation dropped to its lowest in more than three years during March, at 5.96 per cent, while economic growth languished at around 5 per cent in fiscal year 2012-13.

McCully said a key factor in the RBI's likely decision to cut rates will be the favorable trend in wholesale prices.

But, while the moderation in wholesale price inflation is supportive for a rate cut, the scope for cuts remains limited.

In its March review the RBI had warned that room for monetary easing was "quite limited" due to concerns over a widening current account deficit and a growing gap between retail and wholesale price inflation.

"I expect the RBI to sound a little more optimistic than it was in the March policy, but it will still hold its cautious guidance on the pace of rate cuts given that consumer price inflation is much higher than wholesale price index," said Sanjay Mathur, head of economic research for non-Japan Asia at Royal Bank of Scotland.

While consumer prices rose 10.39 per cent in March, marginally easing from 10.91 per cent in the previous month, India's current account gap hit an all-time high of 6.7 per cent of GDP in the December quarter.

However, recent falls in commodity markets, which have seen gold prices tumble and crude oil prices slide to around $100 a barrel, are expected to ease strains on the current account deficit. India is one of the largest importers of both commodities.

The latest poll also showed most analysts expect the RBI to cut rates at least once more after May and bring the easing cycle to an end.

Of 37 respondents, 13 expect the repo rate to have fallen to 7 per cent by the end of September, while a further seven saw it being lowered to 6.75 per cent by then.

A separate quarterly poll earlier this month showed economists cut their growth forecast for Asia's third largest economy for the eighth consecutive time, projecting GDP at 6 per cent in 2013-14, lower than 6.4 per cent seen in a poll in January.

Copyright: Thomson Reuters 2013