Reserve Bank of India is likely to cut the key bank rate next week from an already three-decade low of 6.25 per cent to inject fresh life into an economy facing an uncertain monsoon, analysts said on Wednesday.

They also expect the central bank to cut the cash reserve ratio -- the proportion of deposits banks must keep in cash with the central bank -- from 4.75 per cent when it sets out its monetary policy for the fiscal year on April 29.

This cut is expected to free up some funds for banks to lend to industry and the government, which has a gross borrowing target of Rs 1.66 trillion for the fiscal year to March 2004.

"They will continue to cut rates to push the economy and aid a nascent industrial recovery," said Charan Wadhwa, economist at independent think tank New Delhi-based Centre for Policy Research.

"But within six months, if inflation and government spending are not under control, the picture could change."

The Reserve Bank of India last cut the bank rate -- which banks use to price their loans -- in October to insulate the economy from the country's worst drought in 15 years.

The weather office expects rainfall during the June-September southwest monsoon to be below normal, although a repeat of last year's devastating drought is unlikely.

The southwest monsoon is the lifeline for the world's 12th largest economy as agriculture accounts for around a quarter of gross domestic product and is a key driver of overall demand.

A drop in farm output was the main reason that growth slipped to 4.4 per cent last year from the previous year's 5.5 per cent.

Although this is still respectable given a global slowdown, it is well below the 9.9 per cent growth that China posted in the first quarter of 2003 and the 10 per cent growth that economists say India needs to alleviate widespread poverty.

Reserve Bank of India Governor Bimal Jalan has said he is confident growth this year will touch six per cent despite a poor outlook for the monsoon. He has also said that inflation by the end of the year could settle at 5.0-5.5 per cent.

Inflation seen falling

Inflation has started to drop, after hitting successive two-year highs, boosting expectations of a rate cut.

Wholesale prices rose 6.17 per cent in the year to April 5, compared with an increase of 6.24 per cent in the 12 months to March 29.

Analysts said it was likely to dip further in the coming weeks, with the war in Iraq virtually over.

"Inflation should ease from six per cent-plus, but I do not see it falling below 4.5 per cent in the next six months," said M R Madhavan, head of research at Bank of America.

"Despite inflation staying in the five-per cent region, the RBI is likely to reiterate its soft interest rate bias until there are firm signs of a strong industrial growth."

With the global economy showing few signs of recovery, prices of commodities are likely to remain benign, giving the central bank elbow room to pursue a soft policy, analysts said.

Moreover, the central bank's steady dollar purchases in the face of surging inflows from exporters, expatriate Indians and foreign investments, will continue to keep domestic money supply ample and help its soft rate bias, analysts said.

India's forex reserves were at a record $75.75 billion in the week to April 11, with inflows pushing the rupee up by nearly 1.4 per cent in 2003 to 47.32/33 per dollar.

Analysts said the central bank's dollar buying would also help it manage the government's huge borrowing programme.