MUMBAI (Nov 28): After months of holding one of Asia's highest interest rates to fight inflation, Indian central bank Governor Raghuram Rajan is getting closer to a cut.

Economic growth probably slowed last quarter, inflation is at a three-year low, China lowered borrowing costs and Finance Minister Arun Jaitley is calling for a cut.

While almost all economists expect Rajan to ignore the clamour and hold the benchmark rate at eight percent on Dec 2, markets are pricing in a reduction and forecasters are moving up their rate-cut calls.

“There is some kind of limited room for easing as we go ahead, but not immediately,” said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai.

While inflation has surprised positively, she said, the central bank “should wait for that noise to fade off and also be very, very sure that the easing trajectory will continue”.

The rate cut would signal a divergence among the biggest emerging markets, with India and China easing policy to boost growth as Russia and Brazil raise rates to fight inflation.

Rajan has kept one of Asia’s highest interest rates unchanged since January after pledging to lower Indian inflation once and for all when he took over the central bank last year.

“While we do not expect the RBI to drop its guard against long-term inflation pressures, we think the RBI will find it difficult to ignore the large easing in inflation momentum and is likely to tone down its hitherto hawkish policy rhetoric,” Siddhartha Sanyal and Rahul Bajoria at Barclays wrote in a report yesterday.

There’s an “outside chance” of a cut next week “if Governor Rajan wants to surprise,” they wrote.

'Dose of caution'
Any cut would be balanced with a “generous dose of caution” against estimates of more near-term easing, they said.

While consumer-price inflation eased to 5.52 percent in October, the slowest pace since the index was created in January 2012, a Bloomberg survey this month predicted the rate will be seven percent by March and 6.5 percent a year later.

Rajan is seeking to keep CPI within six percent by January 2016.

He’s raised interest rates three times since taking office 15 months ago and has held discussions with the government to adopt a new policy framework that will probably include a formal inflation target and rate-setting committee.

At the Dec 2 meeting, 29 of 30 economists in a separate survey see him holdings rates, while one predicts a cut to 7.75 percent.

Economists last month advanced forecasts for a reduction to 7.75 percent between April and June, compared with an earlier projection of October to December, and now see the benchmark falling to 7.5 percent by the end of 2015.

Government pressure
Government officials are calling for the rate to fall sooner.

Jaitley said last week that reducing the cost of capital would give a “good fillip” to the economy, while Transport Minister Nitin Gadkari said it’s time to reduce interest rates so contractors can access cheaper funding.

Lower borrowing costs would benefit India, Arvind Virmani, a member of the central bank’s advisory panel, said in a Nov 19 interview.

Gross domestic product probably grew 5.1 percent in the three months through September from a year earlier, according to the median of 36 economists in a Bloomberg survey before data due at 5:30 pm local time today.

That’s slower than the previous quarter’s 5.7 percent.

Interest-rate swaps show investors expect India’s benchmark rate will drop by about 25 basis points by Dec 31 and more than 100 basis points, or one percentage point, by the end of 2015, according to data compiled by HSBC Holdings.

The yield on the 10-year sovereign bond touched 8.14 percent on Nov 26, the lowest level since August 2013.

'Feverish atmosphere'
“The bond market is again in the throes of rate cut excitement,” Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership, said by e-mail.

“In this feverish atmosphere, it appears that sections of the market might be lapsing back into old frameworks that were discarded by the RBI” since Rajan took charge, he said.

While returns for investors such as Schroder Investment Management Ltd. are now outstripping the inflation rate, the so-called real rate of about 2.5 percent is lower than China’s four percent and Brazil’s 4.7 percent, according to data compiled by Bloomberg.

These margins risk being wiped out if inflation accelerates or the US tightens policy.

Foreign funds poured US$4.4 billion into Indian debt so far this quarter after a record US$9 billion investment in the previous three months, exchange data show.

Foreign direct investment from April to September was US$21.5 billion, the highest since 2009, Trade Minister Nirmala Sitharaman told lawmakers on Nov 26.

Modi's role
Modi has enjoyed strong support among analysts and investors.

A Bloomberg Global Poll conducted this month showed that 56 percent were optimistic about his policies.

Modi needs to build on the improved sentiment and pass measures that make it easier to do business in India, according to Prithviraj Srinivas, an economist with HSBC Holdings.

The plunge in global commodity prices, which has helped slow Indian inflation, can reverse next year, he said by phone.

“Since the RBI’s been fighting inflation for quite some time, I think it will be fairly conservative in its approach to changing its stance on monetary policy,” Srinivas said, referring to the central bank.

“Growth should really be driven by investment, and that’s something the government can do rather than the RBI.”