CLSA in a report said the key variable in India is the currency, since renewed rupee weakness would clearly undermine the Reserve Bank of India's ability to ease. With growth slowing, the research house expects RBI to commence easing with a CRR cut on January 24, followed by a rate cut after the Union budget announcement in mid-March.
The first detailed monetary policy review since the curbs to arrest the rupee's slide against the dollar may dwell on the latest threat to economic management from the currency when domestic demand-fuelled inflation itself is yet to ebb.
However, few are forecasting an interest rate cut by Reserve Bank of India Governor Duvvuri Subbarao, despite growth slowing and inflation at a two-year low. Some are hoping for a cut in cash reserve ratio (CRR) without conviction. But everyone is praying, rather impatiently, that he does 'something' soon to revive the animal spirits.
The inflation forecast of 7 percent by March may be retained, but the GDP growth estimate may be sliced to 7 percent, from 7.6 percent, amid falling demand for goods and subdued export growth due to the simmering European crisis. Any action will be a surprise.
"It's worth keeping in mind that there are still upside risks to inflation from pent-up commodity price pressures, fiscal slippages, and slow progress on structural reform," said Leif Eskesen, economist at HSBC. "With growth conditions improving slightly and core inflation still elevated, there is no compelling case to ease monetary policy this time around."
A steadfast Subbarao has conditioned the market not to expect anything that would lead to compromising his anti-inflationary stance, even though some dodgy data such as the Index of Industrial Production have in the past prompted calls for monetary easing. Although he has promised not to raise interest rates as focus shifts to reviving growth, the governor is averse to committing to lowering rates when crude and other commodity prices are either rising, or are subsidised.
With the government poised to lift prices of many administered commodities such as oil, coal and fertilisers to limit the damage to its finances, Subbarao may highlight the potential for reversal in price rise to justify his pause, and not a cut in rates.