The Reserve Bank of India is likely to lower key interest rates by 0.75% next year with a strong possibility of a 0.50% cut during the January-March quarter itself, according to Citigroup.
According to a report, the positive surprises in the recent WPI inflation data- both headline and core- and likely ebbing of inflationary pressures may prompt the central bank to cut key interest growth in its next policy meet.
The third quarter review will be unveiled on January 29.
"Going forward, we maintain our view of 75 bps of easing in 2013, with 50 bps likely during January-March," Rohini Malkani, economist at Citi, wrote in the research report.
One basis point is equivalent to 0.01%.
In the mid-quarter monetary policy review on December 18, RBI kept key interest rates unchanged.
The Reserve Bank of India (RBI) left the short-term lending (repo) rate and the cash reserve ratio -- the amount of deposits banks have to park with RBI-- unchanged at 8% and 4.25%, respectively.
The report further added that "easing core inflation and expectation of lower food and manufacturing prices are key factors behind the likelihood of growth-focused policy in the next months".
Retail inflation, based on consumer price index (CPI), remained close to double digits at 9.90% in November, while, the WPI inflation in November stood at 7.24%.
Though these levels are much above the Reserve Bank's comfort zone of 5-5.5%, inflation is showing some signs of easing in recent months.
"Liquidity conditions will be managed with a view to supporting growth...Thereby preparing the ground for further shifting the policy stance to support growth," RBI had said during the December 18 policy review.
India had been growing around 8-9% before the global financial meltdown in 2008. The growth rate in 2011-12 slipped to a nine-year low of 6.5%.
According to the official data, the Indian economy grew by 5.3% in the July-September period this year, while in quarter ended June 30, the economy grew by 5.5%.
The report further said, "we maintain our view that the worst is over and expect some traction on investments and fiscal measures- cash transfers and tax reforms."