Raghuram Rajan, governor of the Reserve Bank of India, gestures as he speaks during a press conference in Mumbai. Banks from Morgan Stanley to HSBC yesterday said  RBI will halt raising interest rates in todays meeting.

Bloomberg/New Delhi

Banks from Morgan Stanley to HSBC Holdings say India’s central bank will halt raising interest rates this week as Asia’s fastest inflation slows.

Governor Raghuram Rajan, who boosted the repurchase rate three times since he took office in September, will leave the benchmark unchanged at 8% today, according to 36 of 39 economists surveyed by Bloomberg. Three see an increase to 8.25%. Consumer-price gains in India cooled to 8.1% in February from 11.2% in November, the highest in at least two years, government data show.

Falling prices for pulses and vegetables may allow Rajan to keep borrowing costs steady to support Asia’s third-largest economy amid the worst slowdown in a decade. The fixed rate to receive floating payments for a year in the swap market has retreated 14 basis points from a four-month high on January 31 to 8.58%. A similar gauge is at 4.29% in China.

“After three rate increases, the central bank is expected to go into a wait-and-watch mode to see the lagged impact of tightening on inflation,” Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings Inc, said in an interview on March 28. “Markets will view an RBI decision to hold rates as growth-supportive.”

Ten-year government bond yields fell six basis points this month to 8.80% amid bets the monetary authority will refrain from further rate additions, while the rupee appreciated about 3% to 59.89 per dollar. Debt and currency markets in Mumbai are shut yesterday for a local holiday.

At its last policy review on January 28, the RBI unexpectedly lifted the repo rate by 25 basis points, or 0.25 percentage point, to 8% and said further increases are unlikely as long as inflation slows as projected. Wholesale-price gains in India slowed to 4.68% in February, the least since May 2013, according to the latest official figures. The $1.8tn economy expanded 4.5% in the fiscal year through March 2013, the least since 2002-2003.

Recent monetary tightening by the Indian central bank, weaker demand for goods amid the nation’s economic slowdown and lower global commodity prices will help reduce India’s consumer inflation to 7.3% by September, Chetan Ahya, Hong Kong- based economist at Morgan Stanley, said in an e-mail interview on March 28. The US bank sees the RBI holding the repo rate at 8% today.

Rajan, a former chief economist at the International Monetary Fund, said last month the central bank aims to bring down inflation “over time rather than abruptly” in its effort to curb price pressures and generate sustainable growth.

“Rather than administer shock therapy to a weak economy, the RBI prefers to disinflate over time rather than abruptly” raise interest rates, he said in Mumbai on February 27, according to an e-mailed text of his speech. “As of now, we believe the rate is appropriately set.”

Inflation-adjusted bond yields in India have climbed to the highest since 2009 as the pace of price gains slowed, adding to the appeal of the best-performing debt among the four largest emerging markets. The so-called real yield on 10-year government notes jumped 171 basis points this year to 414, and rose as high as 422 on March 3.

Sovereign securities in India returned 3.3% in the past year, JPMorgan Chase & Co data show. They lost 2.6% in Brazil, 0.2% in China and 1.2% in Russia. Societe Generale SA said last month Indian bonds are “too attractive to pass.” Overseas holdings of rupee-denominated debt jumped $5.7bn so far in 2014 after last year’s unprecedented $8bn selloff.

“Should they explicitly comment that rates are going to be on hold for a long period of time, that may be taken positively,” Suyash Choudhary, based head of fixed income in Mumbai at IDFC Asset Management Co, which manages about Rs350bn  ($5.8bn), said in a March 28 interview. “If they project a continued urgency in monitoring inflation and responding to it, that may not be taken positively.”

While the RBI may hold rates this week, the odds of an inflation rebound that would prompt further policy tightening later this year can’t be ruled out, according to DBS Bank.

“The governor will be hesitant to read too much into the recent disinflationary trend, with focus trained on anchoring inflationary expectations,” Radhika Rao, a Singapore-based economist at DBS Bank, said in an interview on March 28.

“We expect the repo rate to be held steady into the new fiscal year, with odds of a rate hike to increase on any potential rebound in inflation third quarter onwards.”

rebound in inflation third quarter onwards.” Bond risk in India has fallen this year to the lowest since June. Credit-default swaps insuring the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years declined 57 basis points since December 31 to 223 on March 27, according to data provider CMA.

“On the inflation front, things are moving in the right direction,” Leif Eskesen, chief economist for India and Southeast Asia at HSBC in Singapore, wrote in a research note dated March 28. “With headline inflation coming down notably and core CPI not rising further, the RBI is likely to stick to its forward guidance and keep the policy rate on hold.”