Analysts at Singaporean bank DBS and British brokerage HSBC today concurred with the majority view expecting a rate cut on Wednesday, but said it will be a "close call" for the Monetary Policy Committee.
DBS said one should not expect aggressive rate cuts by central bank from here on, and the recent uptick in purchasing managers views make the upcoming review a "close call" for the central bank.
"The January PMIs (purchasing managers indices) reinforce that this week's RBI decision will be a close call," DBS said in a note.
The Nikkei manufacturing and service PMIs rose from a soft patch in November-December suggesting that "the impact of the cash crunch is easing", it said.
It further said most orders-related and employment sub-indices also got off their back, which makes the RBI decision a close call between a cut and a status-quo.
"While it's a close call, we expect the RBI to deliver a 0.25 per cent repo rate cut at the February 8 policy meeting on the back of low inflation and a negative output gap," HSBC India chief economist Pranjul Bhandari said in a note.
"It is clear that the central bank is nearing the end of the monetary easing cycle as pent-up demand and easing cash shortage lift growth next year," DBS said, pointing out to oil prices and high rates in the US as a risk.
Bhandari sought some clarity on when the RBI intends to get to the 4 per cent inflation target. "Until it clarifies its intentions, we are assuming that as long as investment is weak, the RBI will target inflation in the 4-5 per cent range. When investment shows surer signs of a revival, the RBI will move more decisively towards the mid-point of 4 per cent" she said.
On factors that can aid the central bank to cut more, DBS said a conservative fiscal policy, easing inflation trajectory and short-term risks to growth keep the door open for further easing.
It termed the Budget proposals as a balanced approach between fiscal discipline and also accommodating growth concerns.
Governor Urjit Patel will be announcing the policy review on Wednesday, the second such announcement after the demonetisation move in November.
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