The Reserve Bank of India (RBI) is under pressure from both, the Ministry of Finance, as well as the Indian industry to cut repo rates by a minimum of 25 basis points in the first monetary policy review in 2013. This will be held on 29 January. According to sources in Mint Street, Mumbai, the Central bank will finally slash rates this time “as the headline inflation has moderated and has currently touched the lowest level in three years”, from 7.24% in November 2012 to 7.18% a month later, because of the downward movement in fuel and manufacturing.

“The Central bank has not cut rates since April 2012, thus leaving the RBI with the freedom to cut policy rates. It will most probably cut rates by 25 basis points after taking into consideration various factors including inflation in both, the wholesale price index (WPI) and consumer price index (CPI),” said a senior official requesting anonymity. He pointed out that inflation in non-food manufacturing sectors has dipped to 4.2% in December from 4.5% in November last year, thus leaving room for rate cuts.

“We expect the central bank to cut rates in this policy meet as there is a lot of room for rate cuts this time. A rate cut is essential to strengthen the economy as India has the highest interest rates among major economies,” said Sudip Bandyopadhyay, managing director, Destimony Securities.

However, the inflation in the CPI has remained high, which has cast a doubt on whether the “monetary hawk”, RBI Governor D. Subbarao, will make any rate cuts in this policy meet.

“The high food price is not allowing the inflation in the CPI to moderate. It is certainly a matter of concern for us,” said another RBI official, who favours Subbarao’s line of high interest rates “to send a signal that the RBI is serious about battling inflation”. He added that this conservative view is echoed by C. Rangarajan, advisor to the Prime Minister.

Earlier this week, Subbarao had said that the slow growth of an economy can be stimulated by either monetary easing or by fiscal stimulus, “but both the monetary and fiscal side have no room for stimulus. So that is the big concern”, said he.

The inflation in the CPI has soared to 10.56% in December last year as it was driven by higher prices of vegetables, edible oil, pulses and cereals.

Industry sources are happy that Subbarao had signalled a rate cut in January-March 2013 in the policy review meet in October 2012. The Central bank chief had previously rejected all calls for rate cuts last year citing high inflation as the key reason.

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