High crude oil prices, which the central bank perceives as a risk to inflation, may limit the extent of rate cut to 25 basis points rather than 50 bps, economists said.
"We expect the RBI to announce a cut in the repo rate at its mid-quarter review, to accommodate for the impact of a rise in real effective lending rates on overall economic activity.
"This will help in providing a conducive environment for revival in capex sentiment and overall growth," said Shubhada Rao, chief economist, YES Bank.
The repo rate is presently at 8.5 per cent, while inflation numbers for January dropped to 6.55 per cent from 7.47 per cent in the previous month.
Headline inflation numbers for January came within the projected trajectory of the central bank for the first time in nearly two years, with core inflation showing substantial moderation, though mainly due to a high base.
GDP growth, on the other hand, slipped to an 11-quarter low at 6.1 per cent for the third quarter, with investments registering a consecutive two quarters of declining growth.
YES Bank, earlier expecting a 50 bps cut in the March policy, now expects a 25 bps reduction following a sharp increase in oil prices since January, which will have the potential to stoke inflationary pressure.
The February inflation numbers will be announced a day before the policy and would weigh on the central bank's mind while making a decision, experts said.
"There is a chance that RBI will reduce the repo rate by 25 bps on March 15.
In the inflation numbers for February, which will be announced on 14th, if core inflation moves in a favourable direction, then that increases the chance of a rate cut.
Even if the headline numbers stay higher than the previous month, core inflation may come down," said A Prasanna, chief economist, ICICI Securities Primary Dealership.
Analysts also said if the growth agenda needed to be pushed through a lower lending rate, then the repo rate becomes the more effective tool for monetary transmission in a falling interest scenario, unlike a rising interest rate scenario when the cash reserve ratio (CRR, the proportion of deposits banks must keep with RBI)
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