Mumbai: The Reserve Bank of India will probably hold interest rates at a seven-year-low on Wednesday as growth recovers, while investors will focus on whether inflation has quickened decisively enough to signal future tightening.

The repurchase rate will stay at 6%, according to 42 of 48 economists in a Bloomberg survey, with the rest seeing a cut to 5.75%. The RBI is expected to retain its growth and inflation forecasts, which indicate price pressures will rise above the 4% medium-term target by the end of March.

“Our focus will be on the tone of the policy guidance, divided between neutral or a hawkish bias," said Radhika Rao, an economist at DBS Bank Ltd in Singapore. “Inflationary risks and firm second-quarter growth numbers provide the central bank with sufficient justification to sound cautious."

The monetary authority will announce its decision at 2:30pm in Mumbai followed by a press conference 15 minutes later.

Growth recovering

Growth in gross domestic product picked up to 6.3% in July-September from a year ago, halting five quarters of deceleration as manufacturing rebounded. However capacity utilization is still low at 70%, signalling slack demand conditions, credit remains subdued and a private gauge on Tuesday showed the dominant services sector contracted in November, raising concerns about the pace of recovery.

The game changer could be the government’s plan to inject a record $32 billion of fresh capital into Indian banks to help them tide over a festering bad-loan crisis, according to Goldman Sachs Group Inc.

“The bank recap could break the vicious cycle between higher non-performing loans, weaker bank balance sheets and slower credit growth that has inhibited the acceleration in India’s growth cycle over the past few years," Goldman economists said in a note. They forecast GDP growth to accelerate to 8% in the year through March 2019, up from a projected 6.4% the previous year and well above the Bloomberg consensus of 7.4%.

Inflation quickens

Supply chains have been disrupted across India following the roll out of a new consumption tax in July and Prime Minister Narendra Modi’s withdrawal last year of high-value currency notes. That’s also contributing to a surge in prices, together with rising global oil costs and higher wages for government employees.

The RBI as well as private economists predict inflation will quicken to about 4.5% by 31 March, and swap traders are pricing in the possibility of an increase in the key policy rate next year even as most economists see no change.

Liquidity tightening

Investors would also want to know the central bank’s stance on tightening liquidity conditions.

The RBI has mopped up Rs90,000 crore through open market bond sales between July and November, on top of debt sold by federal and state governments. Excess liquidity with banks is down to around Rs70,000 crore from a peak of more than Rs5 trillion in March, according to the Bloomberg Economics India Banking Liquidity Index. That has led State Bank of India and the Punjab National Bank—large state-run lenders—to raise rates on bulk deposits.

“The move signals banks’ acknowledgment of tightening systemic liquidity and an indication of the bottoming of the interest rate cycle with inflation rate normalizing and loan growth also showing signs of uptick," Manish Karwa and Abhishek Saraf, analysts at Deutsche Equities India Pvt., wrote in a 4 December note. Bloomberg