India expected to cut rates for first time in nine months
India's central bank is expected to cut interest rates this week for
the first time in nine months in response to the government's recent
economic reform spree and slowing inflation, economists say.
With inflation at a three-year low and a flurry of new measures to
ease investment rules, now is seen as the right time for the bank to
focus on pulling the economy out of its worst growth slump in a decade.
Policymakers are “clearly teed up for rate cuts,” banking on a
further easing of inflation in coming quarters, lower government
borrowing and more pro-market reforms, HSBC economist Leif Eskesen said.
However, those hoping the Reserve Bank of India will announce a big
cut following its policy-setting meeting on Tuesday are likely to be
disappointed.
The bank “is likely to tread very carefully -- given lingering
inflation risks,” Eskesen added.
Like other economists, he said he expected the bank to limit any rate
cut to 25 basis points. The bank's key repo rate -- at which it lends to
commercial banks -- now stands at 8.0 percent.
Any reduction would be welcomed by Prime Minister Manmohan Singh's
scandal-scarred Congress party government, which is anxious to revive
growth before facing voters in general elections due in the first half
of next year. Indian shares have been nosing higher to trade at around
two-year highs in the past week on hopes of lower rates.
“The market is betting on a rate cut of 25 basis points,” said Madan
Sabnavis, chief economist at Care Ratings.
Countries such as China, South Korea and Brazil have all cut rates to
try to shield their economies from the spillover of the eurozone debt
crisis. But India's central bank -- which last cut rates in April after
an aggressive multi-year rate-hiking spree -- has resisted the clamour
from business leaders and politicians for lower borrowing costs to spur
the economy. Growth fell to 5.3 percent in the July-September quarter --
far below the near double-digit pace India set before the onset of the
global financial crisis -- while industrial output shrank by 0.1 percent
in November from a year ago.
AFP |