The Reserve Bank of India is likely to lower key interest rates by 75 basis points next year with a strong possibility of a 50 bps cut during the January-March quarter itself, according to Citigroup.
According to a report, the positive surprises in the recent WPI inflation data—both headline and core—and likely ebbing of inflationary pressures may prompt the central bank to cut key interest rates in its next policy meet.
The third quarter review will be unveiled on January 29. "Going forward, we maintain our view of 75 bps of easing in 2013, with 50 bps likely during January-March," Rohini Malkani, economist at Citi, wrote in the research report.
One basis point is equivalent to one-hundredth of a percentage point. In the mid-quarter monetary policy review on December 18, RBI kept key interest rates unchanged. The RBI left the short-term lending (repo) rate and the cash reserve ratio—the amount of deposits banks have to park with RBI—unchanged at 8 per cent and 4.25 per cent, respectively.
The report further added that "easing core inflation and expectation of lower food and manufacturing prices are key factors behind the likelihood of growth-focused policy in the next months".
Retail inflation, based on consumer price index (CPI), remained close to double digits at 9.90 per cent in November, while the WPI inflation in November stood at 7.24 per cent. Though these levels are much above the Reserve Bank's comfort zone of 5-5.5 per cent, inflation is showing some signs of easing in recent months.
"Liquidity conditions will be managed with a view to supporting growth... thereby preparing the ground for further shifting the policy stance to support growth," RBI had said during the December 18 policy review.
India had been growing around 8-9 per cent before the global financial meltdown in 2008. The growth rate in 2011-12 slipped to a nine-year low of 6.5 per cent.
According to the official data, the Indian economy grew by 5.3 per cent in the July-September period this year, while in quarter ended June 30, the economy grew by 5.5 per cent.
The report further said: "We maintain our view that the worst is over and expect some traction on investments and fiscal measures - cash transfers and tax reforms."