Falling inflation will give RBI room to cut interest rates at policy review

Falling inflation will give the Reserve Bank of India (RBI) room to cut interest rates at a policy review on Tuesday, and cut them again by September, before holding steady to assess the impact of the upcoming monsoon season on food prices, a Reuters poll found.

RBI Governor Raghuram Rajan led an aggressive cycle of policy easing last year, slashing a cumulative 125 basis points off the repo rate to leave it at 6.75 per cent in September. Since then, however, the bank has chosen to wait.

The poll of over 50 economists showed the interest rate was likely to be cut to 6.50 per cent at the April 5 review, showing views unchanged from a Reuters survey conducted last month.

"An accommodative monetary policy is the need of the hour with industrial and agricultural data suggesting weakness," said Debopam Chaudhuri, chief economist at ZyFin, who expects the RBI to front-load with a 50 basis points cut next week.

The poll predicted a second 25 basis points cut to 6.25 per cent during the July-September quarter, but then foresaw no further change until at least mid-2017.

"The RBI will want to wait for some clarity on the monsoon to ascertain the trajectory of food inflation before signaling another rate cut," said Shivom Chakravarty, senior economist at HDFC Bank.

Inflation cooled slightly to 5.18 per cent in February from January's 5.69 per cent, breaking a five-month streak of increases and leaving room for RBI to ease in April.

But, summer rains have been unpredictable recently and 2015 marked a second year of drought in India. Most of the country's population depend on agriculture to make a living and rely on the monsoon for irrigation.

A majority of economists - 18 of 31 who responded to the question - expect the tone of Rajan's upcoming statement to be similar to February's, with 11 saying it would be more dovish and only two saying more hawkish.