India Rate Decision-Day Guide: Rajan Faces Pressure to Cut Again

  • Economists expect a rate reduction, then a prolonged pause
  • Focus will shift to Rajan's 5% inflation target by Jan 2017

Indian central bank Governor Raghuram Rajan is juggling an ambitious inflation target with political pressure to slash interest rates. That has most economists expecting him to cut once more on Tuesday before an extended hold.

While consumer price-gains of 3.66 percent in August again undershot the central bank’s goal of 6 percent by January, Rajan said this month that the pace is closer to 5.5 percent without base effects. That boosts risks to his target of 5 percent by 2017 and 4 percent in 2018.

Forty-two of 52 economists surveyed by Bloomberg expect him to lower the benchmark repurchase rate to 7 percent on Tuesday from 7.25 percent. Separate surveys predict he’ll stay put for the next 12 months as the U.S. will probably raise rates. Swaps are pricing in a cut to 7 percent by the end of 2015.

Here’s what to look for in the policy statement, which will be released at 11 a.m. in Mumbai. Rajan typically holds a press briefing immediately afterward.

Change in tone

Rajan has called his stance accommodative. He may now change his tone to be more balanced, according to Pranjul Bhandari, a Mumbai-based economist at HSBC Holdings Plc. She predicts a "prolonged pause” after a cut on Tuesday.

“Since pressures on inflation and growth exist on both sides, and the RBI has lent a helping hand to growth through 2015, the central bank may be well placed to shift to a balanced stance at this juncture,” she wrote. Rajan has cut rates three times this year.

Signaling a pause?

As markets tanked last month following China’s yuan devaluation, Rajan reaffirmed his view that fighting inflation is the best way to ensure sustainable economic growth.

India’s longer term inflation targets "look ambitious," Goldman Sachs Group Inc. economist Tushar Poddar wrote in a Sept. 22 note. Moreover, he wrote, Rajan would prefer to wait for any action from the Federal Reserve because an expected increase in U.S. rates in December would make Indian investments less attractive and potentially weaken the rupee.

Foreign funds welcome

To counter possible outflows triggered by Fed tightening, Rajan may roll out a welcome mat to foreign funds. One way would be to calculate the investment limit in Indian sovereign bonds in rupees instead of dollars.

Investors have almost exhausted the $30 billion limit imposed in June 2013, when the rupee was about 12 percent stronger than it is now. A shift in the measure would increase the amount of eligible investment.

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