RBI set for third interest rate cut of the year

Mumbai

INDIA's central bank is expected to cut interest rates for a third time in five months when it meets this week, confident that inflation is stable enough to weather the summer monsoon.

The Reserve Bank of India (RBI) has already lowered its benchmark repo rate, the level at which it lends to commercial banks, by 50 basis points to 7.5 per cent this year.

And analysts believe the RBI will snip rates again at its next meeting on Tuesday in a bid to encourage greater lending to businesses and increased consumer spending, stimulating the economy.

"I expect the RBI to cut the rate by 25 basis points," Ashutosh Datar, an economist at IIFL Institutional Equities, told AFP.

Rupa Rege Nitsure, chief economist at L&T Financial Services, agreed, saying she believed the Mumbai-based bank would opt for a "modest" cut.

"Given the uncertainty concerning oil prices and the depreciation in the rupee, which have a high inflationary potential, I don't think many people are expecting a 50-point cut," she told AFP.

The RBI, led by governor Raghuram Rajan, sliced 25 basis points off the repo rate in January - the first reduction in 20 months - before a surprise repeat cut in March.

It kept the key rate unchanged in April, citing inflation concerns and a failure of most commercial banks to pass on lower borrowing costs to customers in Asia's third-largest economy.

But Ms Nitsure said 20 banks were now heeding Mr Rajan's call to reduce their base rate and another cut would motivate others to "follow suit".

"There is a need for borrowing costs to come down because demand is so low and inflation is not a threat," she added.

Prime Minister Narendra Modi's right-wing government swept to power last year pledging to reform and revive a flagging economy.

It received a major boost on Friday when data showed that India's economy grew 7.5 per cent in the first three months of the year, overtaking China.

The government would like the RBI to cut rates further but Mr Rajan has so far made controlling inflation a priority, setting a target of bringing it consistently below 6 per cent by January next year.

In April, consumer inflation fell to a four-month low of 4.87 per cent, well within the RBI's target range. Last week India's top economic advisor suggested that had "implications for interest rates".

Arvind Subramanian added that food stocks were plentiful enough to help contain inflation even if the three-month monsoon, expected imminently, is weakened by the El Nino weather phenomenon as forecast.

Monsoon rains are vital for Indian crops and a particularly dry season can reduce farm output, raising food prices which can be crippling for the tens of millions of India's poor.

"It is possible to contain (inflation) going forward even if the monsoon is not going to be as good," Mr Subramanian added. AFP