The Reserve Bank of India (RBI) is unlikely to lower its key interest rate at its October monetary policy review as inflation remains sticky, but may opt for a cut in banks' reserve requirements to prod them into reducing their lending rates.
The RBI is expected to keep its repo rate unchanged at 8 per cent on October 30, according to 28 of 37 analysts, a Reuters poll showed on Friday.
However, 13 of 28 respondents expect the RBI to cut the cash reserve ratio, the share of deposits banks must keep with the central bank, for the second straight policy review.
"The cut in CRR will translate into monetary transmission as banks will pass on the benefit of lower cost of funds to borrowers by cutting rates. This will be a big positive for revival of investment in the economy," said Brinda Jagirdar, chief economist at State Bank of India, the country's largest lender.
The median estimate of 32 respondents show a 25 basis point cut in the repo rate by the end of December, unchanged from a previous poll in mid September.
Although the country's economic growth of 5.5 per cent is languishing near a three-year low, economists cite a worrisome fiscal deficit and upward pressure on inflation as key reasons for the RBI to hold steady on rates for the fourth time since a 50 basis point cut in April.
September headline inflation hit a 10-month high of 7.8 per cent and is widely expected to head above 8 per cent in coming months.
However, since last month the government has announced a slew of policy measures that it hopes will bolster its finances, spur growth and encourage the RBI to further ease monetary policy.
Finance Minister Palaniappan Chidambaram wants the RBI to respond to the government's fiscal correction efforts and called on the central bank to take "calibrated risks".