The Reserve Bank of India (RBI) is expected to hold its key policy repo rate at 7.50 per cent on the first bi-monthly monetary policy review for the new fiscal on Tuesday but would snip it by 25 basis points (bps) in the next two months, a VCCircle Poll of economists showed.
Interest rate cut is crucial to kick-start investments, particularly to boost the manufacturing sector, which has been struggling even as new methodology to calculate national statistics has catapulted India as the world's fastest growing major economy.
Of the 17 economists polled by VCCircle, only two expect RBI to cut rate on April 7. Median forecasts from the poll suggest that governor Raghuram Rajan would cut the repo rate either in May or in June and will then hold on to further loosening till the start of next financial year.
The central bank has delivered two unexpected rate cuts this year bringing the policy rate down from 8 per cent to 7.5 per cent. The latest cut by RBI came last month after the Union Budget announcement.
However, bad loans from past lending has made banks reluctant to pass on the lower rates to the borrowers—be it consumers or commercial clients.
Economists expect consumer inflation to average 5.5 per cent by the end of fiscal year 2015-16 which is well below the 6 per cent target set by the central bank for January 2016, the poll found.
Earlier, RBI had replaced wholesale price index with consumer inflation as the key guiding force for its monetary policy, aiming to reduce it to under 8 per cent by January 2015 and 6 per cent by January 2016.
Last month it retuned this further and said it will now follow a flexible inflation targeting, thereby moving closer to systems followed by central banks in advanced economies like US and Britain. The new setting would make the governor answerable to the government for the rate decision of the central bank.
RBI is now targeting a 4 per cent consumer inflation with a buffer of 200 basis points or 2 percentage i.e., it is aiming to restrict retail price rise to 2-6 per cent range. Consumer inflation rose marginally to 5.37 per cent in February but remains well under RBI's comfort zone.
With inflation under control, RBI has been trying to loosen its monetary policy stance to boost investments in sync with the government's 'Make in India' initiative.
On the one hand business sentiments are improving, credit growth has been tardy and industrial output has not picked up as yet. Industrial output grew 2.6 per cent in January, better than what economists had predicted but much slower than the pace at which it needs to grow to support the projected high GDP growth in the country.
Nevertheless, the Indian economy is expected to grow 8 per cent in the current fiscal, according to median forecasts from the VCCircle poll, which is in line with the expectations of IMF, World Bank and ADB. The government is aiming at a higher growth with the Economic Survey pegging GDP growth estimate at 8.1-8.5 per cent.
(Edited by Joby Puthuparampil Johnson)