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RBI to lower interest rates by 0.75 per cent in 2013: StanChart

RBI to lower interest rates by 0.75 per cent in 2013: StanChart

The Reserve Bank is likely to lower rates by 0.25 per cent in its March 19 monetary policy review and by another 0.50 per cent before the end of this year to perk up growth, a Standard Chartered Bank report  says.

"We still expect the RBI to cut policy interest rates by another 75 bps (0.75 per cent) in 2013," Standard Chartered said in a research note.

"We expect a positive combination of lower inflation, fiscal consolidation and signs of improvement in the capital account deficit in the first quarter of 2013 to facilitate the rate cuts," it added.

In January, RBI after a  nine-month wait cut policy repo rate by 0.25 per cent to 7.75 per cent to help support an economy expected to report its slowest annual growth rate in a decade.

According to experts, the rate cut on March 19 is expected to support growth levels as inflation is showing some signs of moderation.

Inflation measured by the Wholesale Price Index (WPI) had declined to 6.62 per cent in January. It was 7.18 per cent in December and 7.24 per cent in November.

In January last year, WPI inflation was 7.23 per cent. Meanwhile, according to advance estimates, growth slowed to 5 per cent year-on-year in FY13, much lower than market expectations and the near-term outlook also looks bleak.

According to Stanchart, a rate cut in the ensuing March 19 meeting should encourage investment and support growth, which the global investment banking major believes is expected to recover to 6 per cent year-on-year in financial year 2014.

"This (RBI to cut rates by 25 bps (0.25 per cent) on March 19 and by another 50 bps (0.50 per cent) before year-end), in turn, should encourage investment and support growth, which we expect will revive to 6 per cent y-o-y in FY14," Standard Chartered said.

The report, however, said that "insufficient monetary policy easing and potential government expenditure cutbacks to meet the 4.8 per cent fiscal deficit target pose key downside risks to this view".

Meanwhile, some market participants believe that RBI may wait for lower current account deficit before lowering rates further.

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