RBI holds repo rate, CRR; focus shifts to growth

MUMBAI Tue Dec 18, 2012 6:28pm IST

1 of 2. The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai November 2, 2010.

Credit: Reuters/Danish Siddiqui/Files

MUMBAI (Reuters) - The RBI kept interest rates on hold on Tuesday, ignoring government pressure to reduce borrowing costs, but said it was shifting its focus towards boosting a flagging economy, raising the odds of a rate cut as early as January.

The Reserve Bank of India (RBI) reiterated guidance from its last policy meeting in October that it was likely to resume monetary policy easing in the January-March quarter, as inflation pressures are expected to ease in the next few months.

Wary of stubbornly high inflation, the RBI has kept its key policy rates on hold since a 50 basis point cut in April, in contrast to other big emerging market central banks in China, Brazil and South Korea that have been more aggressive in easing policy to support growth.

(Read what experts say about the RBI's rate decision, click reut.rs/U5CzT6)

On Tuesday, the central held the repo rate at 8.00 percent and also kept its cash reserve ratio (CRR) for banks steady at 4.25 percent, its lowest level since 1974. The CRR is the share of deposits that lenders must keep with the central bank.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," the central bank wrote in its mid-quarter monetary policy review.

GRAPHIC - India output/exports, click link.reuters.com/gaj55s

Reuters India policy page, click here

A Reuters poll last week showed 37 of 41 economists had expected the RBI to hold the policy repo rate steady, while respondents were roughly evenly split over the likelihood of a cut in the CRR.

A lower-than-expected headline inflation reading in data released on Friday, after the polling was completed, had been seen in some quarters as raising the chances of a rate cut.

"Whatever the RBI spelt out in October seems to have got support from the inflation trajectory," said Abheek Barua, chief economist at HDFC Bank, in New Delhi. "Net of the base effect, we see the current trend continuing and a case for a rate cut strengthening, which they could do in January."

WEAK GDP PERFORMANCE

The central bank has repeatedly resisted pressure from the finance ministry to cut rates to prop up an economy that has posted GDP growth below 6 percent for the past three quarters and is on track for its weakest annual performance in a decade in the fiscal year ending March.

Whilst such a growth rate is still robust by the standards of developed economies, it is worryingly sluggish for a country that aspires to annual expansion of at least 8.5 percent to provide jobs for it burgeoning population.

"I think it is good that RBI sees there is room to ease and clearly they are taking a decision, keeping in mind their main job is combating inflation," said Raghuram Rajan, chief economic adviser to the finance ministry.

"But they also have some incentive to seek growth in the country."

The 10-year bond yield fell 3 basis points to 8.14 percent from levels before the decision, reflecting somewhat heightened expectations of a rate cut early in 2013. The benchmark stock index .BSESN was flat.

"Liquidity conditions will be managed with a view to supporting growth ... thereby preparing the ground for further shifting the policy stance to support growth," the RBI said.

The Congress-led minority government, faced with threats of sovereign rating downgrades due to a widening fiscal deficit, is trying to pass key reform bills allowing greater access to foreign investors in the retail, banking and insurance sectors.

Appreciating the government's recent policy initiatives, the central bank said such moves along with further reforms should boost business activity and investment climate.

Standard & Poor's last week issued another warning to India's credit rating, saying a wide fiscal deficit and a heavy debt burden were the most significant rating constraints.

The wholesale price index (WPI), India's main gauge for inflation, softened to a 10-month low of 7.24 percent in November. It has remained above 7 percent for the past three years.

"Signs in softening RBI guidance is apparent as focus has shifted to growth, and odds for a rate cut in the January-March quarter are likely to gather considerable momentum here on," said Radhika Rao, an economist at Forecast Pte in Singapore.

"Barring a sharp acceleration in December WPI, we look for a 50 basis points reduction in Q1 2013, possibly front-loaded in the January meeting."

(Additional reporting by Mumbai Treasury, Arup Roychoudhury; Editing by Alex Richardson)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Popularity Poll

REUTERS SHOWCASE

New Adviser

New Adviser

Arvind Subramanian likely to be chief econ adviser.  Full Article 

Royalty Rates

Royalty Rates

India to hike iron ore royalty, miners may struggle to pass on extra cost.  Full Article 

Commodities

Commodities

Gold near two-month low; set for weekly drop on interest rate fears  Full Article 

Reuters Exclusive

Reuters Exclusive

Apple iPhone 6 screen snag leaves supply chain scrambling   Full Article 

Helping Regional Mills

Helping Regional Mills

Govt raises sugar import duty to 25 pct from 15 pct.  Full Article 

Curbing Risks

Curbing Risks

RBI to lower ceiling on bank loans to a single corporate group.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage