MUMBAI The Reserve Bank of India is expected to reduce its policy interest rate by 25 basis points in a policy review on January 29, making its first cut in nine months on the back of slowing inflation and weak economic activity, economists polled by Reuters said.
Thirty of 40 economists surveyed said the Reserve Bank of India (RBI) is likely to lower its repo rate by 25 basis points to 7.75 percent.
Data released on Monday showing headline inflation slowed to its lowest level in three years, was seen giving the central bank leeway to focus on supporting growth that is set for its weakest expansion in a decade during the fiscal year that ends in March.
"The reason why the RBI can now cut rates is we are seeing some moderation in inflation, and it is likely to continue throughout 2013," said Gaurav Kapur, senior economist at Royal Bank of Scotland in Mumbai.
"They would use this available space to support growth."
The repo rate has been unchanged at 8.0 percent since April, putting India's interest rates among the highest among major economies.
While many central banks have pushed through monetary stimulus packages to beat a slowdown in the global economy, the RBI has stood its ground, citing high inflation and high fiscal and current account deficits.
New Delhi's decision on Thursday to give fuel retailers leeway to raise prices of heavily subsidised diesel could be inflationary, though it is also likely to improve the fiscal deficit, economists said.
India's economic growth, which once seemed poised to hit double-digits, has slumped to below 6 percent in the past three quarters, as sluggish government policy-making and the global slowdown stifled capital investment.
More rate cuts are expected in coming quarters. The median estimate of 29 respondents sees the repo rate at 7 percent by the end of September, lower than the 7.25 percent forecast in a December poll.
Headline inflation in Asia's third largest economy rose an annual 7.18 percent in December, the slowest pace since December 2009, but the central bank governor has said it was still too high for comfort.
India's current account deficit widened to a record of 5.4 percent of GDP in the September quarter, while the fiscal deficit during the April-November period was 80.4 percent of the budgeted target of 5.3 percent for the full fiscal year.
Most economists expect the RBI to hold the cash reserve ratio, or the share of deposits banks have to maintain with the central bank in cash, at 4.25 percent, its lowest since 1976.
Of 36 respondents, 28 expected no change in the CRR, while seven expected a 25 basis points cut. One economist saw a 50 basis points cut.
(Additional reporting by Shaloo Shrivastava; Editing by Ranjit Gangadharan)