Dear Subbarao, we are all waiting for that rate cut...

Time: 11:00 am. Place: Mumbai.

Event: Reserve Bank of India (RBI) Annual Policy Statement for the year 2012-2013.

This is the day all of India has been waiting for. The day when we finally find out, after weeks of speculation, whether the RBI will cut its key policy rate - the repo rate.

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A look at the main business newspapers today shows that almost everyone expects (or hopes) that RBI governor D Subbarao will announce a 25 basis point cut in the repo rate, the rate at which the central bank lends to commercial banks for the short term. (100 basis points = 1 percentage point.) The repo rate currently stands at 8.5 percent.

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If that happens, it will be the first repo rate cut in three years. Some experts also believe there could be a further cut in the cash reserve ratio, the proportion of deposits banks must park with the RBI.

The RBI has hiked rates by a whopping 13 times since March 2010 in a determined bid to stamp out inflation.However, inflation remains above the RBI’s comfort zone, although it has slipped below 7 percent over the past few months.

On Monday, the wholesale price index (WPI), came in at 6.89 percent for March , higher than market expectations but marginally lower than the previous month’s reading of 6.95 percent.

Don’t expect prices to fall much further.In its report on macroeconomic and monetary developments for 2011-2012 released on Monday, the central bank acknowledged that it expected inflation to remain around 7 percent in 2012-13, and that the “probability of further significant moderation” is small.

In other words, this is as good as it gets on the inflation front. More heartening for investors and businesses, the central bank said moderating inflation had opened a window to loosen monetary policy, even as it noted that upward pressures remain. Most experts interpreted these statements as hinting towards a possible rate cut today.

They may not be wrong. With inflation likely to rise in coming months (because of rising food and global oil prices, and a lack of fiscal consolidation by the government), now is perhaps the only chance for the RBI to announce a mild rate cut without significantly damaging its continuing battle against inflation.

Will a 25 basis point rate cut help? In real terms, perhaps not. But it will revive consumer and business sentiment somewhat, which has been highly depressed over most of 2011-2012. An economy whose growth is estimated to have slowed to 6.9 percent in 2011-2012 desperately needs deeper rate cuts to fire it up.

But the RBI’s hands are tied. As a Crisil report notes: _“Food and fuel inflation are expected to remain high during 2012-13. Aweak rupee and pass-through of indirect taxes into prices could also add to inflationary pressure."_That means even if the RBI cuts rates today, there’s limited room to continue that cycle.

Crisil also highlights another point: ”… any pickupin investment growth is more reliant on easing of policy-related bottlenecks than on reduction in interest rates."

Absolutely.If Mr Subbarao does his bit, the government also needs to play its part by initiating growth-friendly policies.

For now though, all eyes are on the RBI governor.

Just a few more hours to go.