India's central bank is likely to leave interest rates unchanged as inflation remains stubbornly above the comfort level. However, a reduction in cash reserve ratio is widely expected.
The Reserve Bank of India, or RBI, is seen holding the repo rate at 8.00 percent and the reverse repo at 7.00 percent. The repo rate is the rate at which the central bank lends to banks and the reverse repo rate is the rate at which the RBI borrows from banks.
The RBI is set to announce its decision at 1.30 am ET on July 31.
The central bank is expected to cut the CRR up to 50 basis point to improve liquidity in the system. The CRR is the amount of money that the banks should set aside as reserves.
The RBI has reduced the CRR in January and March this year. The rate currently stands at 4.75 percent.
Most of the central banks in Asia, namely, the Peoples Bank of China, Bank of Korea and Bangko Sentral ng Pilipinas resorted to rate reductions recently as inflation cooled in many of these countries.
Economists say another reduction in rates by India would harm the inflationary situation in the nation that is already reeling under high inflation. Weak monsoon is likely to spur inflation through high food prices.
Wholesale price inflation fell to 7.25 percent in June from 7.55 percent in May on slowing fuel costs. Still it remains at an elevated level.
Early this month, the International Monetary Fund cut its 2012 growth forecast for India to 6.1 percent from 6.8 percent. For 2013, the growth is seen at 6.5 percent.
In the latest report, the RBI today said inflation is likely to be sticky during 2012-13 despite weak growth outlook. "Persistence of inflation, even as growth is slowing, has emerged as a major challenge for monetary policy," it said.
According to RBI, output expansion in 2012-13 is likely to stay below its potential. Newer risks to growth have arisen from slowing global trade, domestic supply constraints, bottlenecks of industrial inputs particularly with regard to coal and electricity and less-than-satisfactory monsoon so far.
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