By Shamik Paul and Tony Munroe
MUMBAI (Reuters) - The Reserve Bank of India (RBI) left
interest rates on hold on Tuesday but cut the cash reserve ratio for
banks, defying pressure from the government to lower rates for the first
time since April but also indicating it may soon ease policy further.
While the decision to leave the policy repo rate
unchanged at 8.00 percent was in line with forecasts in a recent Reuters
poll, expectations for a rate cut had grown after Finance Minister P.
Chidambaram on Monday outlined a plan to trim the country's hefty fiscal
deficit.
"As inflation eases further, there will be an
opportunity for monetary policy to act in conjunction with fiscal and
other measures to mitigate the growth risks and take the economy to a
sustained higher growth trajectory," RBI Gov. Duvvuri Subbarao wrote in
his quarterly policy review.
(Read expert views on RBI review, click
http://in.reuters.com/article/2012/10/30/rbi-policy-review-repo-rate-idINDEE89T03920121030)
Headline wholesale price index inflation rose to 7.8
percent in September, a 10-month peak, and the RBI said it expects
inflation to rise before easing in the final quarter of the fiscal year,
which ends in March.
"While risks to this trajectory remain, the baseline
scenario suggests a reasonable likelihood of further policy easing in
the fourth quarter of 2012-13," Subbarao wrote.
The market had been positioned for a rate cut, said A. Prasanna, economist at ICICI Securities Primary Dealership.
"There's a positive that RBI has said there's a
likelihood of easing in the Jan-March quarter. Looks like RBI wants
inflation to peak out before cutting rates so we shouldn't expect
anything in December. We expect a 50 basis points cut during Jan-March,"
he said.
India's 10-year bond yield rose around 4 basis points, while the rupee and stocks weakened.
Investors, companies and the government have been
clamouring for a cut to interest rates that have been on hold since
April and remain some of the highest among major economies.
"A rate cut in the face of jump in September WPI, sharp
upward revision to historical numbers and recent rebound in the proxy
core inflation measure, might have put the bank's inflation-fighting
credibility at risk," said Radhika Rao, an economist at Forecast Pte in
Singapore.
While economic growth in India has been slowing,
inflation has not, and the RBI has been calling on the government to
follow through quickly on recent steps to cut its deficit and encourage
investment, and to take further such measures.
"Recent policy announcements by the government, which
have positively impacted sentiment, need to be translated into effective
action to convert sentiment into concrete investment decisions,"
Subbarao wrote.
Chidambaram on Monday outlined a plan to nearly halve
the deficit in just over four years. While he gave few specifics, his
announcement at a hastily called news conference was seen as adding
pressure on the RBI to cut rates.
New Delhi has unveiled a spate of reforms to bolster
investment and rein in its fiscal deficit, including raising the price
of subsidised diesel and lifting caps on foreign investment in several
industries.
The RBI cut its GDP growth forecast for Asia's
third-largest economy to 5.8 percent for the current fiscal year, from
6.5 percent previously, and increased its projection for headline
inflation in March to 7.5 percent, from 7 percent earlier.
The RBI lowered the cash reserve ratio, the amount of
deposits that banks must keep with the central bank, by 25 basis points
to 4.25 percent, a move it said would inject about 175 billion rupees
into the banking system in order to pre-empt potentially tightening
liquidity.
In the Reuters poll earlier this month, economists had been nearly evenly split on whether or not the RBI would lower CRR.
