The Reserve Bank of India on Wednesday slashed its forecast for real economic growth to 6.7% this fiscal year ending March, from its prediction of 7.3% in August.
The pace of growth for the Indian economy has slowed, with GDP for the April to June 2017 quarter down to 5.7 percent from 6.1 percent in the previous quarter.
The market is widely expected to see a rebound in growth in the next three quarters, but annual growth is hard to exceed 7 percent.
India's central bank is under pressure for a cut in its repo rate. He expects the RBI to keep rates unchanged on Wednesday.
Right now, the inflation scenario may not be encouraging for the MPC to go for a big rate cut. Despite keeping rates on hold at their record low of 0.25 per cent (by a vote of 7 to 2), the Monetary Policy Committee of the Bank of England at the end of its September meeting, signalled it was gearing up for a rate increase, possibly later this year, in order to subdue inflation within its official target of two per cent.
While core inflation in August rose to 4.6 percent, high food and fuel prices pushed wholesale inflation at 3.24 percent, to almost double of that over the previous month.
The committee also did not tweak the cash reserve ratio (CRR), which remained unchanged at 4 per cent, but cut statutory liquidity ratio (SLR) requirement by 50 basis points to 19.5 per cent. While exports present an encouraging picture, imports too are expected to rise due to CPEC-related investments and domestic economic activities.
Reverse repo rate is the rate of interest offered by RBI on loan taken by it for a short period from the banks. The outcome was predicted by 31 of 32 economists in a Bloomberg survey, while one saw a cut to 5.75%.
Five MPC members including Governor Urjit Patel voted in favor of the decision, while Ravindra Dholakia sought a policy rate reduction of at least 25 basis points.
If resurgent price pressures limit the RBI's room to ease, the government could be forced to boost spending, imperiling its budget deficit target and risking the wrath of rating companies that downgraded China last month. "[Federal Reserve's] plans of balance sheet unwinding and the risk of normalization by the European Central Bank".
Among its concerns on inflation, RBI cited rising food prices, price revisions after the recent implementation of a national goods and services tax, and stubbornly high core inflation. Food price inflation appears to be picking up again and the government has limited ability to shield consumers from an increase in global oil prices in the past quarter.
The tweak in the SLR is an attempt by Mint Road to nudge banks to lend as it lightens the load on them to make such investments.
"We are expecting a further rate cut of 25 bps during the rest of the fiscal. The report has said that three possible external benchmark that lending could be tied to and the report suggest quarterly reset so that transmission happens soon".