Despite FM call, analysts see Rajan holding rates on Dec 2

Foreign brokerages today said Reserve Bank Governor Raghuram Rajan is unlikely to yield to Finance Minister Arun Jaitley's call for a rate cut at the December 2 policy review.

"Pressure is mounting on the Reserve Bank to cut rates at its December meeting...Jaitley's recent call to lower rates to encourage construction activity has revived expectations for rate cuts but it is unlikely to be swayed by the base effects-driven softening in inflation," Singaporean brokerage DBS said in a note.

Analysts are expecting inflation to fall further in October and November on base effect. Inflation measured by consumer prices has been trending down for over four months, and came in at 6.7% in September. The RBI has set a January 2015 CPI target of 8% and 6% for January 2016.

Its French peer BNP Paribas also said the RBI may not deliver a rate cut in its next meeting.

"Rate-cut speculation remains premature in our opinion, given the still uncomfortably high household inflation expectations, which need to be re-anchored to lock in lower inflation," it said in a note.

In an interview over the weekend, Jaitley had hinted that time was ripe for rate cut with inflation trending down.

"Currently, interest rates are a disincentive. Now that inflation seems to be stabilising somewhat, the time seems to have come to moderate the interest rates," he had said in a media interview.

According to some analysts, the lower GDP growth in the September quarter (some expect to slip below 5%), may put more pressure on the RBI to deliver a rate cut.

"Against this backdrop of weak growth and falling inflation, the Reserve Bank is likely to face mounting pressure to ease rates at the December 2 meeting. That said, the RBI will look past these base-effect swings to focus on anchoring inflationary expectations and ensuring medium-term stability," the DBS note said.