India: Low inflation gives central bank chance to cut interest rates further

A sharp drop in inflation has provided India a window to cut interest rates for a third time in 2015.

The Reserve Bank of India (RBI) will review its monetary policy on 2 June, when it could lower rates further.

But if the RBI chooses to wait beyond next week's review to cut rates, the start of monsoon rains and potential US rate hikes could limit chances for the central bank to reduce the repo rate, currently at 7.50% after two quarter percentage point cuts in March and January.

The Indian economy, Asia's third-largest, still requires stimulus as investment remains low. Low credit growth and weak capacity utilisation also point to an economy only in the early stages of recovery, Reuters reported.

Shubhada Rao, chief economist with Yes Bank, told the news agency: "We are expecting a 25 basis point rate cut in June with a cautious tone, but not too hawkish."

Rupa Rege Nitsure, chief economist at L&T Financial Services, said: "All recent high frequency data point to a severe disinflationary trend in the country. There is no immediate threat from the rupee weakness either, so they have the opportunity of reducing rates until June. After that, there will be more uncertainties."

Capital Economics said in a note to clients: "Signs of continued economic slack and the weakness of inflation are key reasons for the RBI to resume its rate-cutting cycle in its upcoming policy review on 2 June.

"One other important, but overlooked, factor that the RBI is still focussing on before loosening further is evidence of fiscal consolidation without hampering public investment.

"We think that the finance ministry can point to some success in meeting these conditions over the past few months, which should further strengthen the case for more interest rate cuts."

Last week, government data showed India's consumer inflation at a four-month low of 4.87% in April, and industrial output at a five-month low.

At the previous policy review on 7 April, the RBI expressed caution over the economy, noting "mixed signals" in the services sector and potential underlying weakness in consumption.

Since adopting the repo rate as a main tool for interest rate policy in 2004, the nation's central bank has never cut interest rates during the monsoon season running from mid-June to September.