* India keeps policy repo rate at 8 pct
* RBI cuts banks' bond holding rules by 50 bps to 22.5 pct
* Says further tightening may not be warranted
(Updates with quotes, details, background)
By Suvashree Dey Choudhury and Rafael Nam
MUMBAI, June 3 India's central bank governor
Raghuram Rajan on Tuesday eased rules to spur bank lending and
toned down his inflation rhetoric in moves set to be welcomed by
a new pro-business government determined to revive economic
The Reserve Bank of India, which kept interest rates on hold
at 8 percent as widely expected, also hinted it would not raise
rates as long as inflationary pressures continued to ease.
The loosening in credit and the central bank's surprisingly
dovish remarks on inflation will put the onus on the new
government to stick to conservative fiscal spending and broader
reforms to get Asia's third-largest economy back on track,
The decisions from the RBI were widely seen as pragmatic
moves. Rajan has placed fighting inflation at the top of his
agenda, for which he will need the support of Narendra Modi,
India's popular new prime minister.
In turn, investors are hopeful the new government will
respond by narrowing the fiscal deficit and tackling the
supply-side factors that drive up food inflation in India, thus
easing the burden on the poor and restoring investors'
"If the economy stays on this course, further policy
tightening will not be warranted," Rajan said in the RBI
statement, referring to the moderating inflation trend.
The central bank governor added that the Modi-led victory in
elections last month could help "create a conducive environment
for comprehensive policy actions and a revival in aggregate
demand as well as a gradual recovery of growth."
The governor's dovish tone on inflation sparked a rally in
bonds and raised expectations the central bank could even ease
monetary policy as early as this year.
The benchmark 10-year bond yield was trading
at 8.60 percent at 0930 GMT, down 13 basis points from the day's
high after earlier hitting a more than four-month low. The yield
had closed at 8.66 percent on Monday.
Rajan's increased comfort on consumer price inflation -
which cooled in 2014 from the near 10 percent level in the two
previous years - could allow him to take steps to improve growth
after raising interest rates by a total of 75 basis points since
September. Its last tightening move was in January.
Analysts say a concerted effort by the government could help
the RBI meet its target to bring down CPI inflation to 8 percent
by January 2015 and 6 percent the following year.
Although the RBI has a wide latitude in setting monetary
policy, it is not statutorily independent and has to consult
with the finance minister before taking a decision.
On Tuesday, the RBI supported the Modi government in
bolstering growth by enhancing credit available by banks.
The RBI announced a reduction in the mandatory amount of
bonds lenders must park at the central bank - called the
statutory liquidity ratio (SLR) - by 50 basis points to 22.5
percent of deposits, starting in mid-June.
The RBI also reiterated its focus on further developing
money markets as a key way to ensure cash in the banking system
flows to productive sectors, moving away from its piecemeal
approach to injecting liquidity or to specific sectors.
Among the measures on Tuesday, the RBI reduced the liquidity
provided to exporters while pledging to provide additional cash
via term repos - or cash for loan transactions.
"The central bank is aware that the economy needs an impetus
and the RBI is ensuring through its measures today that
liquidity remains a potent tool to revive growth in the real
economy," said Soumya Kanti Ghosh, chief economic adviser at
State Bank of India.
It also relaxed rules on overseas remittances, allowing
Indians to move up to $125,000 from $75,000 after the exchange
rate stabilised. The central bank also allowed foreign investors
to participate in domestic exchange traded currency derivatives.
The Royal Bank of Scotland said in a research note the
increase in annual remittances and trading rules reflected the
RBI's confidence on India's external position.
The concerted efforts by Rajan are likely to be welcomed by
Modi and his government, after the Bharatiya Janata Party
trounced the Congress party in elections last year with a pledge
to create jobs and revive an economy that has grown below 5
percent for two consecutive years.
But Modi, and his finance minister Arun Jaitley, will need
to deliver as they face a slew of potentially competing
challenges, from containing price pressures to upholding fiscal
A key signal of its intentions will be known mostly in July
when the new government is set to unveil a new budget.
(Editing by Jacqueline Wong)