Pressure grows on RBI for rate cut, will Subbarao oblige?

The events of the last few days would strongly determine the Reserve Bank of India's stance as it unveils the annual monetary policy for 2013.

The most recent inflation data indicates that India's wholesale price index continues to be stubbornly high. Inflation rose above expectations at 6.89 per cent in March from 6.95 per cent in February - primarily driven by high food prices. Food inflation came in at 9.84 per cent in March up from 6.07 per cent in February.  The overall inflation was 6.95 per cent in February.

Add to that the most recent and embarrassing revision of factory output for the month of January to 1.1 per cent from 6.8 per cent. Industrial output grew at a tepid pace of 4.1 per cent in February this year. Both sets of numbers indicate softening demand and sliding growth.

The Reserve Bank of India has followed a rather aggressive rate hike policy to tackle inflation - there have been 13 rate hikes in over two years - which has affected demand and growth. While food inflation showed signs of cooling off over the last few months, it is once again surging towards the double digit mark.

Food prices are climbing back up and according to research and ratings agency CRISIL, food and fuel prices will remain high all of 2012. The food price index rose due to higher prices of fruits, vegetables, poultry and grains. Inflationary pressures would be further fuelled by a weak rupee and an increase in indirect taxes. And that could make it difficult for RBI to cut interest rates. A CRISIL stated in a report that it would be premature for the Reserve Bank of India to start reducing policy rates.

Investment as a proportion of gross domestic product has been falling. It declined to 31.9 per cent of the GDP in 2011-2012 from 32.5 per cent  in 2010-2011. Tuesday's quarterly monetary policy could have a bearing on the investment trajectory in the current year as a high interest rate environment along with weak growth conditions have led to companies deferring decisions to start new projects. Moreover, assumptions underpinning finance minister Pranab Mukherjee's recent union Budget are dependent on RBI bringing down interest rates. .

Industry is hoping that the RBI would start easing the interest rate cycle with the policy.  It's a divided house so far - with  some economists and researchers pitching for RBI to hold on to its tight monetary policy stance. Others expect a 25 basis point reduction.