Global banking major HSBC today said the Reserve Bank will limit its rate cut to 0.25 per cent in the policy announcement next week as inflation is still high.
"The RBI is likely to tread carefully, given the lingering inflation risks, limiting the possible policy rate cut to 0.25 per cent," the bank's economist, Leif Eskesen, said in a report.
"It would cut with caution (25 bps), given the lingering inflation risks and to keep New Delhi on its toes."
A 0.25 per cent cut in the repo rate, at which the RBI lends to banks, will take down the key rate to 7.75 per cent from 8 per cent at present.
Inflation, cited by RBI Governor D Subbarao as a major worry preventing a cut in key rates, dropped to 7.18 per cent in December. A day after the December number was released, Subbarao stated that inflation is "still high".
HSBC added that positives like easing inflation, moves on fiscal consolidation and reform implementation make the apex bank ready for the limited cut.
A cut in the cash reserve ratio (CRR), the amount of deposits banks park with RBI, "is not a given", HSBC said, adding given the liquidity deficit, RBI may "signal continued efforts to bring this (liquidity deficit) down".
About the factors which can inhibit the Central bank, it said, "with growth starting to head in the right direction, inflation still elevated and twin deficits wide, the case for policy rate cuts is not strong."
There are, however, positives on the external front with US lawmakers brokering a deal to avoid a fiscal cliff and eurozone showing signs of stabilisation, it said.