India Central Bank Hints at No More Cuts, but Who's Buying That?

Reserve Bank of India (RBI) headquarters in Mumbai
Indranil Mrukherjee | AFP | Getty Images
Reserve Bank of India (RBI) headquarters in Mumbai

India's central bank on Friday gave the markets what they were expecting, a 25 basis point rate cut, but disappointed those who were looking for a more dovish tone from the Reserve Bank of India (RBI) regarding further monetary easing.

The central bank said that further easing would be difficult, but economists told CNBC that despite what the RBI hinted at, rate cuts of up to 0.75 percent are on the cards in the months ahead.

"We think despite the lingering hawkish tone in today's [Friday's] policy statement, there is scope for a number of rate cuts this year," wrote Taimur Baig, chief economist at Deutsche Bank, in a note soon after the announcement.

He added that "we now expect three additional 25 basis points rate cuts this year [June, July, and September], which will take the repo rate down to 6.5 percent when the cycle concludes."

The central bank cut its benchmark repo rate to 7.25 percent, the lowest since May 2011 and the third cut since January, while keeping the cash reserve ratio (CRR) for banks unchanged at 4 percent.

But, the RBI warned that there was "little space" for further monetary easing with upside inflation risks persisting despite wholesale prices falling to their lowest level in over three years in March. Headline inflation in March eased to 5.96 percent.

(Read More: India Cuts Rates, Says Little Room for Further Easing )

The central bank also pointed out that India's high current account deficit, which stood at a record 6.7 percent of gross domestic product (GDP) in the fourth quarter of 2012, poses the biggest risk "by far" to Asia's third largest economy.

Rahul Bajoria, regional economist at Barclays, who expects another 25 basis point cut in the next policy meeting in June, said the central bank's hawkish rhetoric could be justified if inflation was "freezing," staying where it was, but March data have shown that headline inflation is easing. He added that the current account deficit "blowing" out is also a thing of the past.

(Read More: Is India's Inflation Headache Finally Over? )

"The current account was very wide in the fourth quarter of last year, but we have data since March that the trade balance has been actually improving quite a bit, we've seen a pretty sharp turnaround," Bajoria said. Going forward, lower global commodity prices and an anticipated rise in exports is expected to narrow the current account deficit.

Robert Prior-Wandesforde, director of Asian economics at Credit Suisse, is forecasting another 50 basis points in rate cuts to come, based on good news with regard to inflation and the current account deficit.

"We suspect that the [RBI] governor will be surprised further by the weakness of WPI [wholesale prices index) inflation in the next few months, while the current account deficit is also likely to narrow more sharply than anticipated," Prior-Wandesforde said in a note after the rate cut meeting.

Behind the Curve

Glenn Levine, senior economist at Moody's Analytics expects another 25 basis point rate cut in the second half of the year, because he thinks the central bank is behind the curve and should have been cutting rates aggressively in the past 18 months.

"I think they were just too slow and they've fallen quite far behind the curve and now they're only just playing catch up," Levine said. "The tone wasn't particularly dovish, but they did leave the door open I feel."

The central bank also once again targeted the government in its policy note by saying that the government has to do more to ease supply constraints and improve productivity and competitiveness, which Levine said could be another sign of more easing to come.

"Basically what they're saying is we have a hawkish tinge, but if the government gets on board, continues to open up reform and encourage growth in the economy...they're prepared to respond with lower rates - they definitely haven't ruled it out," Levine said.

(Read More: India's Chidambaram Sees 8% Growth by 2015 )

India's economy is expected to have grown at 5 percent in the fiscal year ended March 31, its weakest pace in a decade and even in the current fiscal year, growth is not likely to pick up great momentum, which has led to hope that the central bank may ease more aggressively.

- By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu