A customer holds hundred rupees Indian currency notes near a roadside currency exchange stall in New Delhi, India, May 24, 2024. REUTERS/Priyanshu Singh

By Nimesh Vora

MUMBAI (Reuters) -India's central bank will cut interest rates on Wednesday, despite the rupee repeatedly making all-time lows, in a bid to prioritise growth amid worsening trade tensions with the U.S., according to three analysts.

The views of analysts at Capital Economics, Nomura and Emkay Global diverge from the consensus call that the Reserve Bank of India will hold rates unchanged. Three-fourths of those polled expect the key policy rate will be kept steady at 5.50%.

The rupee, which slipped to a record low on Tuesday, is among the worst-performing Asian currencies year-to-date, down 3.7% against the dollar.

Those arguing against a rate cut say the rupee’s weakness could deter the central bank, particularly as Prime Minister Narendra Modi’s growth-supporting measures have reduced the urgency for monetary support.

A rate cut could also narrow interest rate differentials with the U.S., adding to the pressure on the currency, the analysts say. India's current account deficit makes it reliant on overseas inflows, leading to authorities guarding against currency weakness.

However, Capital Economics argues that with inflation subdued, U.S. tariffs slowing growth, and ample foreign exchange reserves to manage currency volatility, the central bank has room to cut rates to support the broader economy.

"While the weak rupee is a consideration, it is unlikely to constrain the RBI," it said in a note.

Madhavi Arora, chief economist at Emkay Global Financial Services, says that India's relative loss of export competitiveness, driven by higher U.S. tariffs and the inclusion of services in the trade dispute, justifies a degree of currency depreciation against peers.

"Such depreciation would act as a natural stabilizer for a weaker current account deficit, rather than being misread as a rate-easing deterrent," she said.

Sonal Varma, managing director and chief economist at Nomura, says that a rate cut is warranted as inflation remains well below target, and as negative effects of U.S. tariffs are likely to outweigh the consumption boost from the recent goods and services tax cuts.

(Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala)