Indian central bank expected to cut interest rates

India's central bank is expected to slightly lower interest rates for the third time in a row on Friday, despite warnings from policymakers that the room for cuts is limited.

Economists say the Reserve Bank of India is likely to decide on a 25 basis points cut in the benchmark repo rate after meeting in the financial capital Mumbai, with an announcement expected at 11:00am (0530 GMT).

They stuck with predictions, based on a recent easing in inflation, despite a late note from the RBI on Thursday warning of factors that may restrict rates cuts this year.

"In view of macro-financial risks which stay significant, headline inflation remaining above the threshold and consumer price inflation remaining high, the monetary space for action for 2013-14 remains very limited," the RBI said.

Shubhada Rao, chief economist with private Yes Bank, said the warning was "more hawkish than we expected", but she added: "We still expect a 25 basis points cut in rates on Friday."

The case for a rates cut has improved since the RBI met last in March, with India's overall inflation at a near three-and-a-half year low of 5.96 percent in March, although consumer price inflation remains in double-digits.

"The high-frequency indicators -- industrial output and manufacturing activity -- have softened. Inflation has eased further," HSBC's chief economist Leif Eskesen told AFP.

The case for cuts is also strengthened by the news on Thursday that India's manufacturing activity slid in April to its slowest pace of growth for 17 months, according to the Purchasing Managers' Index (PMI) from HSBC.

Government and business leaders have been calling for lower borrowing costs to spur economic growth, which is expected to be almost half the stellar levels of the previous decade at about 5.0 percent in the 2012/13 financial year.

The World Bank on Tuesday lowered India's growth forecast to 6.1 percent for the new fiscal year which started in April, from the 7.0 percent projected six months ago.

"We would be happy if the RBI continues the trend of softening the rates. To what extent, we'd leave it to the wisdom of the RBI," governmental economic affairs secretary Arvind Mayaram told reporters earlier this week.

The government, led by Prime Minister Manmohan Singh, has been battered by a spate of corruption scandals and is keen to revive economic growth before facing voters in general elections due in 2014.

The RBI slashed rates by 25 basis points at its previous two meetings in March and January. Rates had previously been on hold for nine months.