RBI holds repo rate, cuts CRR by 25 basis points

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.

Live Nifty Future Update 30-Oct ( After RBI announcement )

Xpert Nifty
30-Oct

Its a clear breakout but still NF Fut must sustain below 5640

RBI faces rising pressure to cut rates

The Reserve Bank of India (RBI) faces growing pressure to cut interest rates later on Tuesday for the first time since April after the finance minister pledged to rein in the country's fiscal deficit.
Remarks by Finance Minister P. Chidambaram at a hastily called news conference on Monday that he would nearly halve the deficit in just over four years had increased the chances for a Tuesday rate cut, some analysts said.

"Net-net, the odds for a rate cut have increased because of today's press conference," said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.

A Reuters poll on October 19 found most economists expected the Reserve Bank of India to keep its policy repo rate unchanged at 8 percent. Nearly half said the RBI would take a more targeted measure and cut the cash reserve ratio, the share of deposits banks must hold with the central bank, from 4.5 percent in an effort to get banks to pass along earlier rate cuts to borrowers.

The RBI has kept the policy repo rate at 8.00 percent since April despite calls from members of the government and industry for action to revive the country's flagging economic growth.

It says inflation - at a 10-month peak in September - is too high and that government action is needed instead to address its fiscal deficit and supply-side bottlenecks in the economy that fuel price pressures.

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.

While those measures have improved the mood of markets, the central bank has sought more in order to improve the investment climate and lower the fiscal deficit.

On Monday, Chidambaram pledged to nearly halve the fiscal deficit by March 2017 in a bid to avoid a credit rating downgrade and persuade the central bank to cut interest rates. But he offered few concrete steps on how to achieve the goal.

Higher spending on fuel, food and fertiliser subsidies along with sluggish tax revenues have led many economists to predict a fiscal deficit of 6 percent of GDP for the fiscal year that ends in March.

Chidambaram said India's fiscal deficit would hit 5.3 percent of GDP this fiscal year, up from New Delhi's earlier target of 5.1 percent.

In a pre-policy review on Monday, the central bank said that New Delhi's reforms were a step in the right direction but more was needed, and fast implementation was key.

It also said headline inflation, which hit 7.8 percent for September and is expected by many economists to rise to more than 8 percent in coming months, was likely to ease starting in the January-March quarter.

"As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns," the RBI wrote, a sign that it may be moving towards a rate cut. The twin deficits refer to the fiscal and current account deficits.