Mumbai/New Delhi: Economists predict Reserve Bank of India (RBI) governor Urjit Patel will deliver a final interest rate cut today to buoy growth, though the question is whether he will acknowledge it as the last of this cycle.

RBI will lower the repurchase rate, or repo rate, to 6% from 6.25%, according to 34 of 39 economists in a Bloomberg survey. The rest see no change. The rate will stay there at least until June 2018, a separate survey shows, ending a streak of seven reductions since January 2015. If Patel omits any mention of “accommodative" policy, it would be the RBI’s first change in stance since June 2015.

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With deposits surging and economic growth seen dipping to a four-year-low after Prime Minister Narendra Modi’s demonetisation move, Patel is under pressure to lower borrowing costs before a global window for easing closes. The US Federal Reserve left its benchmark lending rate unchanged last week and said inflation will rise to its target even with “gradual" adjustments in interest rates.

“We retain our call of a residual 25 basis-point cut even as the decision in the upcoming policy review will be a close call," said Abhishek Upadhyay, an economist at ICICI Securities PD in Mumbai. “This is also amplified by how the monetary policy committee chooses to communicate that interest rates have bottomed out along with the forecast of a prolonged pause."

One basis point is one-hundredth of a percentage point.

RBI monetary policy committee will announce its decision at 2:30pm in Mumbai followed by a press conference 15 minutes later.

Growth concerns

Government officials have sought monetary stimulus to boost gross domestic product (GDP). Growth may dip as low as 6.5% in the year through March from 7.9% the previous year as the cash squeeze dents demand, finance minister Arun Jaitley’s advisers predicted last week.

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While the government will publish its forecast on 28 February, investment is poised to fall for the first time since 2013 even before accounting for the demonetisation impact.

Inflation soothes

Retail inflation rose 3.4% in December from a year earlier, below the 4% mid-point of India’s inflation target for the second straight month. Bloomberg Intelligence analyst Abhishek Gupta says the dip in core inflation, which strips out volatile food and fuel, opens space for Patel to cut rates.

The RBI’s six-member monetary policy committee voted unanimously to keep interest rates unchanged in December as it wanted to assess the impact of demonetisation and the Fed’s stance. It reiterated its commitment to the inflation target and warned about the risk of rebounding oil prices.

Budget comfort

Patel will have some comfort on government spending. Jaitley on 1 February vowed to narrow the budget deficit to 3.2% of GDP in the year starting 1 April from 3.5% the previous year. While wider than an earlier target of 3%, the goal is lower than economists’ estimates of 3.3% and, if met, the shortfall would be the smallest in a decade.

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“We expect RBI to deliver a 25 basis point repo rate cut on 8 February, given continued fiscal consolidation and likely undershooting of its near-term inflation target," said Sonal Varma, Singapore-based economist at Nomura Holdings Inc. “However, with global factors turning adverse, this is a close call." Bloomberg

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