Investing in India

Reserve Bank of India likely to hold rates as room for cuts narrows

The two sides to India's workforce story

India's central bank is likely to keep its policy rate unchanged on Tuesday, following a big cut two months ago, and to sound cautious about the scope for more easing as it aims to meet its 2017 inflation target and braces for a U.S. rate hike.

All 45 respondents surveyed by Reuters last week expected the Reserve Bank of India to hold the repo rate at 6.75 percent, after easing it by 50 basis points at its last policy review in late September.

RBI Governor Raghuram Rajan will also likely reiterate an "accommodative" stance in his statement, in the wake of data on Monday showing the economy grew 7.4 percent in the July-September quarter, faster than China but below the government's goal of 8.0 to 8.5 percent growth.

But analysts are less certain about whether Rajan will cut the rate early in the new year. Although India will comfortably meet its target of keeping annual consumer inflation to 6 percent in January, Rajan is expected to shift focus towards getting it down to around 5 percent by March 2017.

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That's an ambitious target for a country that less than two years ago suffered double-digit inflation. A recent pay hike to government employees and potential food price shocks could easily push up consumer price inflation from the 5 percent hit in October, analysts warned.

Meanwhile, the Federal Reserve is widely expected to raise U.S. rates in December for the first time in nearly a decade.

Although India has outperformed other emerging markets over the past two years, the country is not immune to Fed-related worries.

Concern about selling by foreign investors sent the rupee to a two-year low on Friday. During November, it lost more than 2 percent against the U.S. dollar, one of the worst performances in Asia, as foreign investors sold $1.5 billion in bonds and stocks.

India's economy outpaces China; RBI seen holding rates

A. Prasanna, an economist at ICICI Securities Primary Dealership Ltd in Mumbai, doubts that Indian interest rates can be cut before April.

"It is very difficult for inflation to sustain below 5 percent in India," he said.

RBI Governor Rajan has eased the repo rate by 125 basis points since January, as inflation has eased thanks in large measure to a prolonged slump in commodity prices.

Raghuram Rajan, governor of the Reserve Bank of India
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However, Rajan has been mindful of becoming dependent on this windfall. He has pushed the government to pass reforms and resolve problems such as poorly kept roads and historically high spending that has kept inflation high in India.

The governor has spent months improving the country's defenses against a Fed hike, building up foreign exchange reserves to near a record high of $352.37 billion, enough to cover about 10 months of imports.