So near and yet so far – is what economists predict about the rate cuts scenario as the Reserve Bank of India (RBI) policy meet nears. While the apex bank is expected to cut policy rates by 125-150 basis points (bps or one-hundredth of a percentage point) in 2012, none is expected on January 24.

“With growth conditions improving slightly and core inflation still elevated, we believe there is no compelling case to ease monetary policy this time around,” said Leif Eskesen, chief economist for India and the Asean of HSBC.

“Moreover, we do not expect a cut in the cash reserve ratio (CRR) this time around to ease liquidity constraints, which would be addressed through open market operations (OMO or buy-back of government bonds and thus increasing availability of funds with banks),” Eskesen added.


Most economists predict that the RBI will pause its rate hike cycle on Tuesday continuing its December stance to an extent, when it stopped short of hiking rates, after 13 policy rate hikes since March, 2010.
The main trade-off for policy action is between inflation and economic growth, where inflation takes the primary position compared to growth or vice-versa based on the macro conditions.

The rate actions are signalled through repo (the rate at which banks borrow from the RBI) and reverse repo (rate that RBI pays banks on their overnight deposits) rates, which are at high levels of 8.5 per cent and 7.5 per cent, respectively.

Arun Singh, senior economist at Dun & Bradstreet (D&B), said, “Domestically while headline inflation continues to moderate, inflationary pressure still persists in the economy. Thus, the RBI is unlikely to cut the policy rate before April, 2012.”

December wholesale price index (WPI) inflation came in at 7.5 per cent year-onyear (YoY), falling sharply from 9.1 per cent in November. The sharp fall in headline WPI was led by food inflation, which continues to decline.

The RBI’s preferred measure of core, non-food manufactured inflation cooled to 7.7 per cent YoY from 7.9 per cent YoY previously. But higher prices of basic metals and chemical products pose a threat. The growth in fuel prices continued to be in double digits (14.9 per cent YoY in December versus 15.5 per cent in November), on rising prices of aviation turbine fuel (ATF).

“In the short-term, we expect WPI inflation to drop to seven per cent YoY around March, 2012 and remain in the six to seven per cent range toward end-2013. In the medium term, we believe WPI inflation is unlikely to fall below six per cent and could easily rise again when the economy enters a recovery phase, as the structural factors continue to put medium-run upward pressure on inflation,” said Tomo Kinoshita and Aman Mohunta, economists at Nomura.

The inflation threat from weaker rupee is also expected to continue in the January-March quarter, as some securities firms like Nomura, expect the currency to touch a low of Rs.55 against the US dollar during the current quarter.