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 clamor and hold the benchmark rate at 8 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 Ltd. 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 Plc wrote in a report yesterday. There’s an “outside chance” of a cut next week “if Governor Rajan wants to surprise,” they wrote.

David Fuller's view

Raghuram Rajan is a big asset for India and he is sensibly determined to break the inflationary psychology which has plagued India for so long.  

While India’s inflation rate is coming down, the situation is complicated by the previous government’s expensive subsidies which need to be phased out over the next few years.  However, this requires GDP growth and higher earnings for India’s poorest. 

Sorting out India’s problems seems like the 12 Labours of Hercules after so many decades of economic mismanagement, but Narendra Modi and Raghuram Rajan are up to the challenge.