* RBI reiterates Oct guidance of further easing in Jan-March
* Central bank keeps key repo rate unchanged at 8 pct
* Cash reserve ratio also held steady at 4.25 pct, lowest
* Says to manage liquidity conditions to support growth
By Suvashree Dey Choudhury and Aradhana Aravindan
MUMBAI, Dec 18 India's central bank 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.
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.
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
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 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
"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)