The Reserve Bank of India (RBI) is likely to keep its benchmark repo interest rate unchanged at a five-year low of 6.50 percent at a policy review on Tuesday, according to all but one of the 44 economists polled by Reuters this week. The survey forecast just one more rate cut in the coming year, with most expecting the Reserve Bank of India to cut by 25 basis points to 6.25 percent in the July-September quarter, and thereafter hold steady until at least until the end of the third quarter next year.
The poll also showed the RBI was expected to hold banks' cash reserve ratio steady at 4 percent, and also leave it unchanged until at least September 2017. The RBI embarked on an easing cycle in January last year that had helped fuel consumer spending - one of the factors behind India's faster-than-expected 7.9 percent year-on-year economic growth in the quarter through March.
The world's fastest growing big economy is expected to benefit from good rains forecast for this year, after two successive years of drought. That could boost consumption further, especially in rural areas, but it could also stoke inflation, making the central bank more likely to stay cautious.
"Even if the monsoon is normal, there will be less room to cut beyond 25 basis points, as core inflation is unlikely to ease further," said Hanna Luchnikava, senior economist for Asia Pacific at research house IHS Global in Munich. Annual retail inflation rose to 5.39 percent in April from 4.83 percent in March.
A majority of economists - 23 of 34 who responded to an extra question - expect the tone of Rajan's upcoming policy statement to be "neutral" compared to the previous statement. Seven said it would be more dovish and 4 picked more hawkish. While the inflation outlook will determine the RBI's policy stance, Rajan is also expected to focus on monetary policy transmission, especially since banks have been reluctant to pass on to borrowers the full benefits of the central bank's rate cuts so far.
"The RBI will remain focused on better liquidity management and quicker pass-through of previous cuts," Luchnikava said.
