The signage of Reserve bank of India is seen at its entrance in Mumbai. Analysts expect the central bank to cut the repo rate by 25 basis points to a two-year low of 7.25% when it holds its policy review on May 3.

Reuters/Mumbai

 

The Reserve Bank of India is likely to cut interest rates next week for a third time this year, drawing comfort from a fall in inflation as it seeks to help lift the economy from its lowest growth in a decade, according to a Reuters poll.

Thirty-seven of 42 analysts polled last week expect the central bank to cut the repo rate by 25 basis points to a two-year low of 7.25% when it holds its policy review on May 3.

“They really want to provide support to economic activity,” said Tuuli McCully, senior economist at Scotiabank.

The RBI is also likely to leave the cash reserve ratio (CRR) unchanged at 4% on May 3, according to 26 of 38 economists. The CRR is at its lowest level since 1976.

The RBI has cut its benchmark rate by 25 basis points twice this year, having earlier resisted calls from industry and the government to ease monetary policy for much of 2012.

The latest poll’s finding are in line with one taken in March.

India’s headline inflation dropped to its lowest in more than three years during March, at 5.96%, while economic growth languished at around 5% in fiscal year 2012/13.

McCully said a key factor in the RBI’s likely decision to cut rates will be the favorable trend in wholesale prices.

But, while the moderation in wholesale price inflation is supportive for a rate cut, the scope for cuts remains limited.

In its March review the RBI had warned that room for monetary easing was “quite limited” due to concerns over a widening current account deficit and a growing gap between retail and wholesale price inflation.

“I expect the RBI to sound a little more optimistic than it was in the March policy, but it will still hold its cautious guidance on the pace of rate cuts given that consumer price inflation is much higher than wholesale price index,” said Sanjay Mathur, head of economic research for non-Japan Asia at Royal Bank of Scotland.

While consumer prices rose 10.39% in March, marginally easing from 10.91% in the previous month, India’s current account gap hit an all-time high of 6.7% of GDP in the December quarter.

However, recent falls in commodity markets, which have seen gold prices tumble and crude oil prices slide to around $100 a barrel, are expected to ease strains on the current account deficit. India is one of the largest importers of both commodities.

The latest poll also showed most analysts expect the RBI to cut rates at least once more after May and bring the easing cycle to an end.

Of 37 respondents, 13 expect the repo rate to have fallen to 7% by the end of September, while a further seven saw it being lowered to 6.75% by then.

A separate quarterly poll earlier this month showed economists cut their growth forecast for Asia’s third largest economy for the eighth consecutive time, projecting GDP at 6% in 2013/14, lower than 6.4% seen in a poll in January.