REUTERS

NEW DELHI

INDIA’S first interest rate cut in three years may be its last for a while. The Reserve Bank of India (RBI) cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly.

The RBI, which was tightening monetary policy long after central banks elsewhere began easing, lowered its policy repo rate to 8 percent, compared with expectations for a 25 basis point cut in a Reuters poll.

“RBI is indicating that there is a limit for further rate cut expectations, and I think they are pretty much done with further rate cuts this year,” said Rajeev Malik, economist at CLSA in Singapore.

The RBI also warned that India’s current account deficit, which widened to 4.3 percent of GDP in the December quarter, is “unsustainable” and will be difficult to finance given projections of lower capital flows to emerging markets in 2012.

The rupee has been under pressure as foreign investors worry about persistent inflation, a yawning current account gap and fiscal indiscipline on the part of New Delhi, prompting concern about the country’s balance of payments.

Investors and companies cheered the rate cut, with bond yields and swap rates falling sharply, although the rally was capped by expectations for few further cuts in the near term. The BSE Sensex ended 1.2 percent higher.

Some RBI-watchers said Tuesday’s move was risky given the potential for resurgent inflation.

“The RBI was clearly itchier to cut policy rates than expected, but the 50 basis points cut may have been a bit too premature and aggressive, in our view. If that turns out to be the case, it could hurt RBI’s credibility while doing little to raise growth on a sustained basis,” HSBC economist Leif Eskesen wrote.

RBI Governor Duvvuri Subbarao said the deeperthan- forecast cut is intended to ensure that banks cut their lending rates soon. Indian banks have been reluctant to lower lending rates amid stilltight liquidity and high deposit costs.

The country’s largest lender, State Bank of India (SBI.NS) said later on Tuesday that it would cut rates on some loans that have high interest rates, while ICICI Bank (ICBK.NS) said it would reduce deposit and lending rates. Neither were more specific.

Economists have in recent weeks been scaling back their rate cut forecasts. Nomura said it expects the RBI to hold off from cutting rates at its next reviews in June and July, and forecast just one more 25 bps rate cut in 2012. Citigroup expects just one more rate cut in the current fiscal year.