Mumbai, June 18
India’s central bank is expected to lower interest rates on Monday to spur borrowing and investment in the face of a worrying economic slowdown, despite persisting concerns over inflation.
Economists mostly predicted a further easing in rates by the Reserve Bank of India (RBI) following its first reduction in three years in April, amid a host of economic problems for the once-booming Asian giant.
The economy grew just 5.3 percent in January to March, its slowest quarterly expansion in nine years.
"The pressure on the RBI to help to revive growth remains significant," said Siddhartha Sanyal, chief India economist at Barclays Capital.
"This will lead to RBI action on Monday, in our view a 25 basis point reduction in the repo rate remains our base case expectation," he said.
The central bank’s policymakers are due to announce their decision at about 0530 GMT. They will also decide whether to lower the cash reserve ratio -- the sum commercial banks keep on deposit.
Data on Thursday showed a marginal rise in wholesale price inflation in May to 7.55 percent on an annual basis, posing a dilemma to the rate-setters ahead of their meeting in Mumbai and likely limiting their scope for aggressive cuts.
But Barclays Capital said the data had "not been a major surprise" and core inflation, on which the RBI places more importance, had been contained under the five percent mark for three months running.
India cut interest rates by a higher-than-expected 50 basis points in April to 8.0 percent in a bid to spur faltering growth, after keeping them on hold since late last year.
Rates were previously hiked 13 times from March 2010 in one of the most aggressive monetary policy tightening drives of all major economies.
The rate rises subdued inflation that was near double-digits for most of last year and had caused huge hardship to India’s hundreds of millions of poor.
Policymakers’ attention has since turned increasingly to the slowing economy.
Following the latest shock GDP figures, industrial output stalled in April with growth of just 0.1 percent year-on-year, suggesting continued weakness in the current financial quarter and strengthening the case for a rates cut.
India is also grappling with a gaping fiscal deficit, a weak rupee, the impact of the eurozone debt crisis and plummeting business confidence.
Coalition bickering has brought Prime Minister Manmohan Singh’s once ambitious reform agenda to a near standstill, while new tax policies seen as hostile to foreign investment have added to the gloomy economic climate.
Ratings agency Standard & Poor’s warned this month that India could be the first of the BRIC emerging economies to lose its investment-grade debt classification unless it revived growth and rekindled its reform agenda.
Business information agency Dun and Bradstreet agreed that strong government action was critical, saying rates cuts alone would not provide enough of a boost to the industrial sector and investor sentiment.