Mumbai, Feb 7: The Reserve Bank of India is expected to hold key interest rates at its final monetary policy review for this fiscal on Wednesday -- its second after November's note ban -- in the wake of banks being flush with funds post-demonetisation and a firming up of global oil prices.
As a result of the surge in bank deposits following the recent demonetisation of high value currency, lending rates have fallen by up to 1 per cent.
According to analysts, the RBI may take the cautious route considering the volatility in inflation and how banks have substantially cut their lending rates this year following the demonetisation of high value currency notes.
"The remonetisation exercise may hold back the rate cut as it is expected to be more effective after the remonetisation exercise is concluded fully and there is absolute clarity on the increase in lendable resources for the banks," a Citigroup report said in this regard.
In a surprise move earlier in December, the RBI's Monetary Policy Committee (MPC), during its second bi-monthly monetary policy review -- the fifth of the fiscal -- kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25 per cent.
According to the review panel, its decision to keep the key lending rates unchanged was taken after considering various global and local factors, such as a likely hike in the US interest rates, which has since been effected by the US Federal Reserve.
Moreover, acting as a further constraint for the central bank, a few MPC members have highlighted the need to start focusing on the mid-point of the government's medium-term inflation target of 4 per cent with a leeway range of 2 per cent either way.
Reflecting the impact of demonetisation, India's consumer price-indexed (CPI), or retail, inflation declined to 3.41 per cent in December from 3.63 per cent in the month before.
From an average level of 4.9 per cent in 2015-16, CPI inflation appears poised to moderate to around 4.6 per cent in the current fiscal.
In this connection, while state-run oil marketers failed to make the fortnightly revision in transport fuel prices due last week, the Indian basket of crude oils closed trade on the last trading day on Thursday at over $55 a barrel, latest official data showed.
With global oil prices firming up following the output cut by producers from last month, Brent crude traded at $56.94 a barrel on Friday, while the US West Texas Intermediate traded at $53.95.
Rising oil prices present a challenge to India's growth, the Economic Survey presented in Parliament last week said.
"Price of crude oil (Indian basket) has increased from $39.9 in April 2016 to $52.7 in December 2016. For the next financial year, the recent uptick in global commodity prices, in particular crude oil prices, pose an upside risk," the Survey said.
Meanwhile, expectations of a rate cut by the RBI were provoked by a key macro-economic data showing services sector contracting for the third straight month in January.
The Nikkei Services Purchasing Managers' Index (PMI) survey showed that input cost inflation slowed since December, while average selling prices contracted again, which may prompt the RBI to be "accommodative" at its forthcoming monetary policy review.
"PMI price indicators point to relatively muted inflationary pressures in the private sector economy. As such, there is room for accommodative monetary policy," the report said.
The MPC is meeting over two days from Tuesday and the review will be announced on Wednesday afternoon.