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All eyes on Subbarao as rate cut expectations rise

Mumbai: RBI Governor Duvvuri Subbarao is expected to go slow on his over two-year-old anti-inflationary posture and go with the common mood by unveiling a softer interest rate regime on Monday, as more and more dark clouds gather over the economy, though the price index still remains above RBI`s comfort zone.

Following the shocking latest GDP numbers, which showed that economic expansion had hit a nine-year low at 6.5 percent in FY12, there have been incessant calls from the government as well as economists to give growth concerns a priority, rather than the inflation.

Last Saturday, Finance Minister Pranab Mukherjee had expressed confidence that Reserve Bank will "adjust the monetary policy". "I am confident the RBI will adjust the monetary policy, as we are adjusting fiscal policy (to prop up the economy)," Mukherjee said at an industry event here.

The RBI Governor will unveil the mid-quarter review of monetary policy on Monday, wherein, it is expected, he will bring down the key short-term lending rate or repo rate by at least 0.25 percentage point to 7.75 per cent, and may even lower the cash reserves ratio by up to 1 percentage point.

So far this year the Governor has reduced CRR by a hefty 125 bps and the repo rare by a more than expected 50 bps as the core inflation began to ease and growth began to dodder.
This was a radical departure from his 20-month rate-hike cycle beginning March 2010 wherein he had ratcheted up lending rates by a whopping 375 bps.

But headline inflation is not giving the Governor any comfort at present, as it rose to 7.55 per cent in May. Yet, the IIP numbers released last week strengthened the call for rate cuts as the April factory output data was barely in the green zone at a paltry 0.1 percent.

The steep contraction in exports, which in May fell by over 3 per cent and the steep plunge of the rupee also make a case for easing of rates.

Chief Economic Adviser Kaushik Basu and Planning Commission head Montek Singh Ahluwalia have called for pro-growth and out-of-the-box measures from the RBI.

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