India Central Bank Holds Rates, but Shifts Focus to Growth

Indian Rupees
Robert Clare | Getty Images
Indian Rupees

India's central bank left its key interest rates unchanged as expected on Tuesday but said policy focus was shifting towards growth, reiterating its October guidance of further easing in the first quarter of 2013 as inflation was seen cooling.

The Reserve Bank of India (RBI) has been resisting calls from the government and business to cut rates due to elevated inflation, in contrast to other big emerging market central banks in China, Brazil and South Korea that have been more aggressive in easing policy to stimulate growth.

The RBI, which had last cut its policy rate in April, held the repo rate unchanged at 8 percent and also kept the banks' cash reserve ratio (CRR) steady at 4.25 percent, its lowest since 1974.

A Reuters poll last week showed 37 of 41 economists had expected the RBI to hold the policy repo rate steady, while respondents were split over a cut in the CRR, with 16 of 33 expecting the RBI to reduce the ratio of deposits that lenders must keep with the central bank by 25 or 50 basis points.

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"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.

The 10-year bond yield fell 3 basis points to 8.14 percent from levels before the decision, after initially gaining 1 bp, as the RBI signaled a shift to focus on growth, raising expectations for a rate cut as early as January.

However, the BSE Index fell 0.2 percent as of 0538 GMT. "Whatever the RBI spelt out in October seems to have got support from the inflation trajectory. 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," said Abheek Barua, chief economist at HDFC Bank, in New Delhi.

With headline inflation expected to ease more in coming months, the central bank also assured that it would manage liquidity conditions to support growth.

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

The Indian economy 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.

The wholesale price index, India's main gauge for inflation, softened to a 10-month low of 7.24 percent in November from a year earlier prompting some economists to bring forward their rate cut expectations.