However, some analysts say RBI Governor Raghuram Rajan may delay the rate cuts amid mounting concerns over the government's fiscal health
Plunging global oil markets helped India post slower-than-expected wholesale price inflation in December, raising hopes for an early cut in interest rates to help the economy out of its longest phase of sub-par growth since the 1980s.
The wholesale price index (WPI) rose 0.11 per cent year-on-year compared with a 0.6 per cent jump forecast by economists in a Reuters poll. Wholesale prices were unchanged in November.
Data released on Monday showed consumer price inflation quickened at a slower-than-expected pace of 5 per cent in December, remaining well within the Reserve Bank of India's (RBI) medium-term target of 6 per cent.
With a near 60 per cent fall in global oil prices since last June and food prices remaining in check despite poor monsoon rains last summer, some analysts expect the RBI to reduce its repo rate at a policy review on February 3. The repo rate has stood at 8.0 per cent for the past year.
"Falls in commodity prices have brought down WPI, CPI (consumer price index) alike," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.
Wholesale fuel prices fell an annual 7.82 per cent last month, their biggest fall since September 2009. Month-on-month, the prices were down 2.4 per cent.
Similarly, food prices recorded a 1.9 per cent fall in December from a month earlier. However, they were up 5.2 per cent year-on-year compared with a 0.63 per cent gain in November.
"All indicators now point that the RBI should cut rates by at least 25 basis points in its next policy meeting on February 3," said Srivastava.
However, some analysts say RBI Governor Raghuram Rajan may delay the rate cuts amid mounting concerns over the government's fiscal health.
Sluggish revenue receipts have driven up the fiscal deficit to 99 per cent of the full-year target in just the first eight months of the year that ends in March, casting doubts on Finance Minister Arun Jaitley's ability to trim the shortfall to a seven-year low of 4.1 per cent of gross domestic product (GDP).
Concerned over slow economic growth, some government aides are also pushing to row back on fiscal deficit targets when Jaitley announces the 2015-16 budget next month. They have advocated more spending on infrastructure projects that could lift growth.
Rajan, however, has set fiscal consolidation as a pre-condition for lowering rates.
"Given the uncertainties, the RBI might prefer to monitor the content of the end-February's budget and credibility of fiscal targets before easing rates," said Radhika Rao, an economist at DBS Bank in Singapore.
"This suggests rate cuts might begin April 2015 onwards, with a small probability of inter-meeting cut in March."