A file photo of RBI Governor Raghuram Rajan
The Reserve Bank of India is expected to keep interest rates unchanged on Tuesday, staying focused on containing inflation, while adopting a more dovish tone in response to the government's call for help to revive economic growth. The announcement will come at 11 a.m.
Forty-one of 45 economists saw the RBI keeping the repo rate at 8 per cent at its policy review, while four expected a reduction of 25 basis points (0.25 per cent).
Most think the RBI will wait until February or April to ease rates, despite sharply lower inflation.
Limp economic growth during Prime Minister Narendra Modi's first six months in power, however, has caused unease in government quarters, raising some calls for an early reduction.
Officials told Reuters last week that Finance Minister Arun Jaitley would press RBI Governor Raghuram Rajan for a cut in rates when they held a customary meeting before the central bank's policy review. There was no official confirmation whether that meeting had taken place.
Data released on Friday may have helped Dr Rajan ward off pressure for a rate cut, as a slowdown in economic growth was not as bad as earlier feared.
"A rate cut now would be premature and inconsistent with Dr Rajan's earlier comments," said A. Prasanna, economist at ICICI Securities Primary Dealership Ltd.
"If they were to cut rates now, RBI would risk inflation surprising down the line and the associated loss of credibility."
Helped by tumbling oil prices, India's annual consumer price inflation slowed to 5.52 per cent in October, sharply down from a peak of 11.16 per cent struck in November last year.
Dr Rajan has said that he will not hold rates for longer than needed. But analysts say that the central bank governor remains wary of factors outside his control, like volatile oil prices, even with the inflation rate running below the RBI's target of 6 per cent inflation by January 2016.
The Indian economy is struggling to emerge from its slowest phase of economic growth since the 1980s. Friday's data showed year-on-year growth slipped to 5.3 per cent in the July-September quarter, down from 5.7 per cent in the previous quarter.
India's economy needs far faster growth to create jobs for all the young people joining its workforce in coming years.
While holding the tiller steady, Dr Rajan will have to strike a balance to avoid alienating senior government figures, as there is a discussion expected before the budget announcement in February to agree on a new monetary policy framework.
The government is also expected to amend the RBI Act to incorporate a monetary policy committee that gives voting rights to officials both within and outside the central bank.
Copyright: Thomson Reuters 2014
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