RBI may cut interest rates for the first time in 3 yrs

Mumbai: The Reserve Bank of India (RBI) said inflation was likely to remain near current levels during the fiscal year, with risks still to the upside, sounding a cautious note a day before it is expected to cut its policy interest rate for the first time in three years.

Earlier on Monday, India reported annual wholesale price index (WPI) inflation for March at 6.89 per cent, mainly driven by higher food prices, exceeding forecasts.

"While inflation has moderated, risks to inflation are still on the upside," the RBI said in a report.

"Monetary policy would ... need to support growth without risking external balance or inflation by excessively fuelling demand," the report said.

The RBI has left interest rates on hold after raising them 13 times between March 2010 and October 2011. It disappointed many investors a month ago when it left rates unchanged, accompanied by strong anti-inflationary comments.

On Monday, the central bank said inflationary drivers remain, with inflation "likely to remain sticky at about current levels" in the fiscal year that started this month.

"Price pressures persist with considerable suppressed inflation in oil, electricity, coal and fertilisers, (and) the incomplete pass through of rupee depreciation," it said.

The government heavily subsidises fuel and fertilisers, and is expected eventually to free up fuel prices in order to ease its fiscal burden, which would add to inflation.

Most analysts polled by Reuters last week expected the RBI to begin its easing cycle on Tuesday with a 25 basis point cut in the policy repo rate to 8.25 per cent, while a minority expected it to bring down the cash reserve ratio for banks by 25 basis points to 4.50 per cent.

An RBI survey of economists forecast the Indian economy to grow at 7.2 per cent in the fiscal year that began on April 1, little changed from the 7.3 per cent forecast in the last survey three months ago.

Growth in Asia's third-largest economy slowed to 6.1 per cent in the three months to December, the weakest in nearly three years. The government has forecast growth in the fiscal year that ended on March 31 to dip below 7 per cent for the first time in three years.