India's central bank is expected to cut interest rates for a second time this year on Tuesday in an effort to kickstart the country's sharply slowing economic growth, economists said.
The Reserve Bank of India (RBI) is seen announcing a 25-basis-point cut in the benchmark rate when policymakers meet in financial capital Mumbai, even though data last week showed annual inflation rose to 6.84 percent in January.
India's growth is far lower than the levels notched up over the past decade and government and business leaders have been clamouring for lower borrowing costs to spur the economy.
But the bank, concerned about persistent inflation, had kept rates steady for nine months until January.
"Despite the high inflation, the case for a March easing has increased," said Siddhartha Sanyal, chief India economist at Barclays Capital, forecasting a 25-basis-point cut.
Economists say there is room for a rate cut because core inflation, which strips out volatile goods such as food and fuel, has fallen to a near three-year-low of 3.8 percent, despite the rise in overall inflation.
In January, the RBI cut the benchmark repo -- the rate at which it lends to commercial banks -- by 25 basis points to 7.75 percent, marking the first cut since last April.
Also, the government says the bank should look favourably on its budget promises last month to put its economic house in order and cut a gaping fiscal deficit.
"There is a case for the RBI to cut policy rates and the central bank should take comfort from the government's efforts to cut the fiscal deficit," Finance Minister P. Chidambaram told reporters in capital New Delhi on Monday.
Still, while most economists expect a small rate cut, they rule out chances of significant monetary easing over the next few months given concern over stubbornly entrenched inflation.
RBI governor Duvvuri Subbarao last week reiterated his worries about inflation, which he said hurt growth prospects when above 6.0 percent.
"It's not possible to bring inflation down without sacrificing some growth. But you have to realise the growth sacrifice is only in the short term," he said.
"In the medium term, low inflation -- price stability -- is very important for sustained growth," he said, seeking to rebut charges that the central bank is stifling growth by not lowering borrowing costs fast enough.
The government forecasts the economy will expand by just 5.0 percent in the year to March 31, the weakest pace in a decade.
The government, led by Prime Minister Manmohan Singh, has been battered by a spate of corruption scandals and is keen to revive economic growth before facing voters in general elections due in 2014.