RBI expected to keep interest rates unchanged until after budget

The Reserve Bank of India (RBI), having cut its policy interest rate just three weeks ago, is expected to hold rates steady at its monetary policy review on Tuesday, leaving its next move until after the government presents its annual budget on February 28.

The timing of the 0.25 per centage point cut in the repo rate by RBI on January 15 caught markets off-guard, even though investors were expecting the central bank to embark on a easing cycle at some point during the early months of 2015.

Comforted by falling world oil prices and inflation slowing, the RBI, however, saw little point in waiting any longer to reduce borrowing costs in an economy that was struggling to gather momentum.

But RBI Governor Raghuram Rajan said at the time that the central bank's ability to cut further would partly depend on the government efforts to reduce the country's fiscal deficit.

With that in mind, most economists polled by Reuters expect the RBI to keep its repo lending rate steady at 7.75 per cent at Tuesday's monetary policy review, but reduce rates quickly later so long as the budget does not disappoint.

"While we anticipate a front-loading of rate cuts, these would be put into effect after the budget, after the RBI looks at the government's fiscal roadmap and the quality of its fiscal consolidation plan," said Shubhada Rao, chief economist of Yes Bank in Mumbai.

Not everyone thought the RBI would wait until then. A quarter of the analysts surveyed held out expectations for another 25 basis points reduction.

Whether the Reserve Bank cuts rates on Tuesday or not, markets are pricing in more interest rate cuts over the rest of the year.

The plunge in global crude prices and bigger-than-expected falls in domestic vegetable and fruit prices have led to sharply easing inflation. Consumer prices rose 5 per cent in December, well within the RBI target of 6 per cent by January 2016.

Until a massive revision in the country's economic growth figures for the previous 2013-14 financial year, the country had seemed to have been struggling to recover from its slowest phase of growth since the 1980s.

But last Friday, the government revised its data, changing the formula to show the economy grew 50 per cent faster than earlier estimated in FY14.

Growth for the previous fiscal year is now put at 6.9 per cent, instead of 4.7 per cent. That is below the 8 per cent rate needed to create enough jobs for the millions of young Indians joining the workforce each year, and analysts doubted whether the revision would be used by the RBI as a reason to delay future rate cuts.

(Reuters)