RBI monetary policy review today; 0.25% rate cut likely

New Delhi: Reserve Bank of India (RBI) is likely to cut interest rates to a six-year low on Wednesday at its first monetary policy review after demonetisation of old Rs 500 and Rs 1,000 currency notes.

A majority of analysts and bankers are expecting RBI Governor Urjit Patel-led Monetary Policy Committee (MPC) to cut rates by 0.25 percent, with some expecting a 0.50 per cent reduction.

Analysts say the RBI has room to act given consumer inflation eased in October to 4.20 percent, the slowest pace in 14 months and below the RBI`s target of 5 percent for March 2017.

The rate cut will help revive private investments and can act as a counter to the demonetisation drive, which is slated to impact growth in the short-term.

It said global factors like the Fed rate stance and its impact on global bond yields, currency impact because of political situation in Eurozone and commodity prices following the OPEC decision to cut production will restrict the central bank.

A rate cut would signal the RBI`s priority is in supporting the economy, which grew an annual 7.3 percent between July and September, the fastest rate for a large economy in the world but still below the levels needed to sustain full employment.

Investors will also want more details from Patel about how the RBI is managing the process of demonetisation after coming under criticism from market participants for frequently announcing adjustments to its policies.

Most analysts say the RBI will likely partly roll back a directive for banks to place their entire deposits under the central bank`s cash reserve ratio in a bid to absorb the extra liquidity generated by the government`s banknotes move.