India's central bank is widely expected to cut interest rates for the first time in nearly five years in Governor Sanjay Malhotra's first monetary policy review on Friday, aiming to boost economic growth which is seen falling to a four-year low.
Over 70% of respondents, 45 of 62, in a January 22-30 Reuters poll forecast the RBI would cut its key repo rate by 25 basis points to 6.25% at the conclusion of its February 5-7 meeting, while others expect it will keep rates unchanged, mostly because of above-target inflation.
The monetary policy review follows closely on the heels of the federal budget, where the government slashed personal tax rates to boost spending and spur growth.
"With the finance ministry still keeping the overall fiscal deficit in check, there is scope for the RBI to do more to boost the economy," said Shilan Shah, deputy chief emerging markets economist at Capital Economics.
"This strengthens our conviction that the Bank – under new leadership - will begin easing monetary policy at the conclusion of its MPC meeting on Friday," he added.
The government said it is likely to post a full-year fiscal deficit of 4.8% of GDP in the current year ending March and expects to improve its finances, targeting a fiscal deficit of 4.4% in 2025-26.
The Indian economy is seen expanding by 6.3%-6.8% in the coming fiscal year after likely growing 6.4% this year, its weakest in four years and sharply below the 8.2% pace in fiscal 2024.
Despite the slowdown in growth, inflation has stayed above the central bank's medium-term target of 4% for most of the past year, while the rupee has been steadily weakening, despite substantial dollar selling intervention from the RBI.
While core inflation, seen as a better measure of demand driven price pressures, has been below 4%, some economists believe the central bank may still need to focus on bringing down headline inflation.
"With the budget ring-fencing growth risks, the monetary policy committee could concentrate on inflation management, while taking into account external spillovers," said Vivek Kumar, an economist with QuantEco Research who doesn't expect a cut on Friday but expects a total 50 bps easing in H1 FY26.
"The RBI, meanwhile, could enhance liquidity support further as the existing liquidity deficit dilutes the MPC's 'neutral' policy stance," he added.
The RBI announced a host of measures in late January which together would infuse 1.5 trillion rupees ($17.22 billion) into the banking system, but investors are hopeful of more steps including another a cash reserve ratio reduction on Friday.
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