D Subbarao's equanimity is noteworthy. The Reserve Bank of India governor has steadfastly fended off criticism - from the government and outside it - for leaving key interest rates unchanged after every policy review in the past nine months. No mean feat for the central banker of an economy that is set to post its slowest growth in a decade.
However, the review meet today (January 29) may be an entirely different ballgame. In an NDTV Profit poll of 18 banks, 80 per cent of the bankers expect the central bank to cut its key repo rate - the rate at which RBI lends to commercial banks - by 25 basis points (or 0.25 per cent), from the current 8 per cent, while 15 per cent of the bankers expect a steeper 50 bps cut.
India is the only BRIC country in which lending rates are stuck at their 2008 peak, according to a Bank of America Merrill Lynch report. If the central bank does cut the repo rate, commercial banks may pass on the benefits to customers, reducing their interest rates on loans.
Despite constant calls for an interest rate cut from the industry to boost production, which contracted by 0.1 per cent in November, the central bank has time and again stated that controlling inflation remains its key objective.
After growing at an alarming pace, India's headline inflation rose an annual 7.18 per cent in December 2012, the slowest since December 2009, sparking expectations of an interest rate cut by the central bank.
In its previous policy meets, the RBI has toyed with the cash reserve ratio (CRR) - the portion of deposits that banks have to mandatorily park with the RBI - cutting it twice, by 25 bps each time, this fiscal year. The CRR currently stands at 4.25 per cent, the lowest since December 1974.
From the bankers polled by NDTV Profit, 80 per cent expected no change in the CRR, 15 per cent said the RBI will go for a 25 bps cut, while 5 per cent expected a 50 bps cut.
The reforms bullet
Earlier this week in Hong Kong, Finance Minister P. Chidambaram had said the RBI must strike a balance between the needs of pushing growth and controlling inflation.
The RBI has been seen as growing confident that the government, gripped by inertia for much of last year, is finally doing its bit to stir the economy from its torpor.
In September 2012, the government announced big bang reforms, saying it would open up its supermarket sector to foreign chains and allow more foreign investment in airlines and broadcasters.
More recently, it gave oil companies more room to set regulated diesel prices.
Government allows oil firms to revise diesel prices; raises LPG cap to nine.
In a sign of a fresh measure that could be in the pipeline, Mr. Chidambaram said in an interview to a news channel that India should consider hiking taxes for the "very rich".
The moves are intended to bolster investor sentiment, mend battered government finances and stave off a possible credit rating downgrade to junk status.
India's fiscal deficit touched Rs 413,000 crore in April-November, or 80.4 per cent of the budgeted target for the full fiscal year through March.
The government expects a budget deficit in the current fiscal year of 5.3 per cent of GDP. Economists had pencilled in a deficit of at least 6 per cent of GDP, although they have narrowed that to 5.5 per cent or 5.6 per cent of GDP following the various government measures in recent months.
The country's current account deficit hit a record high of 5.4 per cent of GDP in July-September, although Mr Chidambaram said the country can finance the shortfall without cutting into national reserves.
Mr Subbarao met with the Finance Minister Thursday, 24 January, to discuss the macroeconomic for a customary pre-policy discussion.
"Our next quarterly review policy is scheduled for Tuesday. As per standard practice, I have come to review the macroeconomic situation with the finance minister," he told reporters after the meeting.
In October, the RBI gave uncharacteristically specific guidance, saying there was a "reasonable likelihood" of policy easing in the January-March quarter. It reiterated the same point in December.
However, it won't be that easy a path for the RBI. For starters, consumer price inflation bounced back into double digits to 10.56 per cent in December, its third successive month of acceleration.
Also, with the government removing subsidies on bulk diesel sales, the WPI index may see some volatility. India aims to include the bulk price of diesel fuel in its calculation of wholesale inflation as early as February, two government officials with direct knowledge of the matter said, a move that is likely to add upward pressure to the main price index after New Delhi's move last week to partially deregulate prices, Reuters reported. The next headline data release, for January, will be made in mid-February.
In a report on the economy, issued a day before its policy review, the RBI spoke of taking a measured approach to support growth while balancing the risks.
"Given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained," the central bank said in its report on 'Macroeconomic and Monetary Developments' in the third quarter of this fiscal year.
"Monetary policy needs to continue to be calibrated in addressing growth risks as inflation remains above the Reserve Bank's comfort level and macro economic risks from twin deficits persists," the RBI warned.
With inputs from agencies