With increasing risks to economic growth the Reserve Bank of India is under pressure to reduce interest rates. However, until last October it had to increase interest rates 13 times by a cumulative 375 basis points to 8.5% to tame stubbornly high inflation. Hence, it will want to be sure that inflation is under control before reducing rates. The inflation readings for January and February at least will be watched to see if prices are finally under control. If they are, we expect the RBI to start reducing interest rates from around March-April. About 100-125 babsis points cuts are expected this year, with 50 babsis points by June to spur economic growth.

David Fuller's view There are local contributing factors to India's inflationary problem, not least regarding poor distribution of food. Nevertheless, the global trend generally indicates some easing of inflationary pressures in growth economies, following monetary tightening and last year's moderate decline in GDP.

India's Sensex Index is certainly discounting lower rates and it is encouraging to see that the Banks Index has led this rally. I would not be surprised to see a partial reaction and consolidation, followed by additional gains as monetary policy becomes more accommodative.