RBI likely to cut interest rates to prod sputtering economy

By Suvashree Dey Choudhury and Tony Munroe

MUMBAI (Reuters) - The Reserve Bank of India is expected to cut its policy interest rate by a quarter point on Friday for the third time this year as it looks to bolster an economy growing at a decade low and takes comfort from easing inflation.

While investors are hoping to hear a less-hawkish tone from RBI Governor Duvvuri Subbarao, the RBI in its report on macroeconomic and monetary developments on Thursday warned there is "very limited" room for further policy cuts in the current fiscal year, which started in April.

Headline wholesale price index inflation fell to 5.96 percent in March, the slowest in more than three years, although the consumer price index remained high at 10.39 percent, a key worry for the central bank.

A Reuters poll last month found that 37 of 42 economists expect the RBI to cut the repo rate by 25 basis points to 7.25 percent, which would be a two-year low. The poll found that most economists expect the RBI to leave the cash reserve ratio unchanged at 4 percent, the lowest since 1974.

Subbarao, whose five-year term ends in September, has been known to spring a surprise, with some in the market hoping for a 50 basis point rate cut on Friday, or a quarter-point cut in the CRR alongside lower interest rates.

Long a hawkish global outlier as it struggled to keep inflation in check, the RBI began cutting interest rates in April 2012 but that easing has done little to spur demand in Asia's third-largest economy as bureaucratic red tape and regulatory uncertainty have deterred capital investment.

Indian Finance Minister P. Chidambaram, who has been pushing for pro-growth reforms and has been courting global investors, has also called for further monetary easing to boost growth.

Investors will pay close attention to whether there is a softening in Subbarao's tone at Friday's policy review, as they look for clues on the chances for more rate cuts in coming months.

"The probability of more rate cuts is increasing due to the persisting slow pace of growth, softer inflation, and favourable commodity prices," said Siddhartha Sanyal, India economist at Barclays,

who said he expects a 25 basis point rate cut on Friday and a similar cut by mid-2013 despite the tone of Thursday's RBI report.

Indian GDP growth hit a near four-year low of 4.5 percent in the December quarter, while growth for the fiscal year which ended in March is expected to be around 5 percent, the weakest in a decade and far below the country's double-digit aspirations.

India's current account deficit touched a record-high 6.7 percent of GDP in the December quarter, also squeezing the RBI's room to ease policy, although it is likely to fall to about 4.4 percent in the March quarter on higher exports and easing gold imports, a Reuters poll found. (Editing by Simon Cameron-Moore)