RBI likely to cut short-term lending rate by 25 bps: Barclays

Repo rate refers to the rate at which banks borrrow from the RBI.

New Delhi: Amid slower growth, the Reserve Bank is expected to reduce its short-term lending rate by 0.25 percent in its policy review on Monday, Barclays has said in a report.

"We now look for more easing from the RBI...We now expect India to cut rates by 25 basis points next week, and by another 75 basis points in the coming months, 50 basis points more easing than we previously expected," the report said.

One basis point is equivalent to 0.01 percent.

RBI will release its mid-quarter review of monetary policy 2012-13 on Monday.

Barclays said RBI has room to support economic activity as industrial production growth remains weak and the core inflation continues to push lower.

Core inflation is a measure of inflation which excludes certain items that face volatile price movements, notably food and energy.

The industrial production grew at just 0.1 percent from a year ago in April. Meanwhile, the wholesale price index based inflation rose to 7.55 percent in May from a year ago because of higher food and fuel prices.

"Weak fiscal dynamics and an increasingly complicated political backdrop are constraining the possibility of growth -supporting initiatives from the government.

Also, the continued threat of negative actions from rating agencies has put additional pressure on the government and limited its ability to boost spending in order to support growth," it said.

This puts the onus of supporting growth on monetary policy in the coming months, it said.

Accordingly, "we revise our base-case forecast for rate cuts to 150 basis points cumulatively during FY2012-13 (50 bps already delivered in April), up from earlier expectation of 100-125 bps".

This means a further 100 bps of cuts in the repo rate in the remaining months of FY 12-13, including a likely 25 bps cut on 18 June, the report said.

Repo rate refers to the rate at which banks borrrow from the RBI.

The May inflation print, though not clearly low, was close to market expectations to pave the way for another round of RBI action next week, in our view, it added further.

Barclays also expects the RBI to cut the cash reserve ratio (the portion of deposits banks need to park with RBI) in its Monday policy review.

It said the continued poor showing in industrial activity and weakness in leading indicators reinforces worries about slowing growth, and pose downside risks to their GDP forecast of 7.1 percent for FY2012-13.

"We believe headline inflation, though still elevated, is not a major obstacle to further RBI rate cuts. In fact... Core inflation has been softening, and if it stays anchored around 5 percent year on year, we think this would create room for the central bank to adopt a more accommodative stance" Barclays said.