RBI seen cutting repo rate by 25 bps on September 29

The Reserve Bank of India (RBI) is likely to cut interest rates for the fourth time this year at a policy review next week, as falling energy prices have cooled inflation and the economy has slowed, a Reuters poll showed.

Several government policymakers and business leaders have advocated a cut in interest rates to boost economic growth, but the central bank's priority is to ensure a sustainable reduction in inflation.

Forty-five of 51 economists polled this week predicted the repo rate will be cut by 25 basis points to 7.0 per cent, a four-year low, at the policy review on September 29.

A month back, economists gave only a 60 per cent chance of it happening.

Since then, consumer inflation sank to a record low of 3.66 per cent in August, over two percentage points lower than the central bank's Jan 2016 target, while annual economic growth slowed to 7.0 per cent in the quarter ending June.

Abhishek Upadhyay, economist at ICICI Securities predicted a cut as recent data suggested inflation would comfortably undershoot a target of 6 per cent in January.

"But, given the long lags in monetary policy transmission, further accommodation will be contingent on achieving the medium-term inflation target of 5 per cent for January 2017," Upadhyay said.

Inflation in India has typically stayed stubbornly high, but a steep fall in global commodity and oil prices has brought it under control, even though there are abiding concerns that weak monsoon rains could lead to a spike food prices.

Twenty-seven out of 37 of the analysts surveyed said the inflation outlook would determine the RBI's stance.

Only seven economists said it would depend on how well commercial banks pass on the benefits of lower rates to their borrowers. Two economists said the likely timing of an expected rise in US interest rates would be crucial to the RBI's decision-making.

Slackening global demand and concerns over economic growth abroad, particularly in China, were key reasons the Federal Reserve stood pat this month, but the US central bank is expected to raise rates for the first time in nearly a decade in December.

The poll also showed that while the RBI could cut rates on Tuesday, its tone in the policy statement was unlikely to change from the cautious note struck in August, when it spoke of the risk of latent food inflation and a need to anchor medium-term inflation.

If the RBI does cut interest rates this month, economists expect another reduction of 25 basis points by the end of the poll horizon in 2016, taking the repo rate to 6.75 per cent.

The cash reserve ratio, currently at 4.0 per cent, is not expected to be changed any time over the next year.

Economists were divided on whether the central bank will shift its focus to the medium-term inflation target of 4 per cent by March 2018, or stick with the short-term goal of 6 per cent by early next year at the coming meeting.