Mumbai: Economists expect the Reserve Bank of India (RBI) will tilt towards growth rather than continue to be hawkish when it presents its mid-quarter review of monetary policy on Friday, on the back of a rapid fall in the rupee and a sagging economy.

Continuing high inflation, however, has dashed hopes of a policy rate cut or liquidity easing measures, they said.

Wholesale prices rose 9.1% in November, whereas expectations were for a sub-9% reading. The final inflation number for September was raised to 10% from 9.7%, data released on Wednesday showed.

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Inflation remains higher than RBI’s March-end target of 7%, but there is a near consensus among economists that growth will get prominence in Friday’s review.

RBI’s “focus on growth will be more pronounced," predicted Saugata Bhattacharya, chief economist at Axis Bank Ltd.

RBI governor D Subbarao at Parliament House in New Delhi on Wednesday. PTI

July-September GDP grew 6.9% from a year earlier, lower than the 7.7% increase in April-June. The government’s chief economic adviser, Kaushik Basu, has said growth in October-December could be slower.

Factory output shrank 5.1% in October, for the first time in two years as production in manufacturing, mining and capital goods was hit.

Jahangir Aziz, chief economist for India at JPMorgan Chase and Co., expects RBI to express concerns on the depreciating rupee and weak global economic scenario.

“They will have to say something on the rupee, though it is likely to be more on the lines of what they have already said, like the rupee has weakened due to global factors and the euro zone crisis," he said.

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The rupee’s course is similar to that of the currencies of Brazil, Turkey, Mexico and South Africa that have a current account deficit, he added.

The rupee has weakened by 16.6% against the dollar since August as risk-averse investors moved to the US currency after rater Standard and Poor’s downgraded US debt.

On Thursday, the rupee touched an all-time low of 54.60 a dollar before recovering to end the day at 53.63.

Aziz said that though there were expectations of a cut in the cash reserve ratio (CRR), or the portion of deposits banks need to keep with RBI, it will be “absurd" if this is done in the current scenario.

“The first instinct of the central bank would be to tighten liquidity and hike rates so that they can squeeze out the shorts on the currency. To cut CRR and reduce the cost of borrowing will make the rupee cheaper," Aziz said. “But RBI’s options are limited because growth is slowing and inflation is likely to come off."

High interest rates generally attract foreign inflows that would support the local currency. But economists say a rate hike is highly unlikely. RBI has hiked its main policy rate 13 times by a total of 525 basis points (bps) since March 2010. A basis point is one-hundredth of a percentage point.

Samiran Chakraborty, head of research, India, Standard Chartered Bank, said he expects the policy tone to be more dovish than in October.

“There could also be some kind of regulation change on currencies to attract foreign flows in the country. RBI has several options, starting from ECBs (external commercial borrowings) to NRI (non-resident Indian) deposits liberalization, etc.," he said.

RBI has already raised the interest rate ceiling on foreign currency loans to 350 bps above the six-month London interbank offered rate (Libor) for overseas loans maturing in three-five years, and hiked interest rates on non-resident rupee deposits between one year and three years to 275 bps above Libor, from 175 bps—a rate that had remained unchanged since 15 November 2008.

But it made it mandatory for companies to bring the money immediately into the country if raised for rupee expenditure in India.

Interest on foreign currency deposits in Indian banks has been increased to Libor plus 125 bps from Libor plus 100 bps.

On Thursday, RBI tightened the rules on forward contracts on dollar-rupee by directing banks not to rebook cancelled contracts.

Indranil Pan, chief economist, Kotak Mahindra Bank Ltd, said he expects RBI to release a calendar to buy back government bonds to ease liquidity in the banking system.

RBI has bought back 24,309 crore worth of government bonds through three so-called open market operations (OMOs). The first auction was held on 24 November.

Economists expect RBI to detail a calendar rather than annouce single auctions as is the current practice. “We expect an OMO calendar. Inflation is easing smoothly and it looks like RBI can comfortably achieve 7% inflation by the end of March," Pan said. “Just as there were many paragraphs on inflation earlier, we could see many such paragraphs on growth this time."

Tushar Poddar and Vishal Vaibhaw, economists at Goldman Sachs, wrote in a note on Wednesday that buying back government bonds will continue to remain RBI’s preferred method to inject liquidity.

“Much weaker growth will prompt RBI to ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (which RBI has been doing), then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012," they said.

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Graphic by Sandeep Bhatnagar/Mint