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India cenbank defies pressure to leave rates on hold

Mumbai, October 31, 2012

India's central bank has left interest rates on hold 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 ease policy in early 2013.

Leaving the policy repo rate unchanged at 8 per cent was in line with forecasts in a Reuters poll.

But rate cut expectations had grown after India's finance minister on Monday outlined a plan to cut the country's hefty fiscal deficit, which is a concern of the central bank.

Finance Minister P Chidambaram appeared disappointed with the central bank's decision, as were investors, who pushed bond yields and swap rates higher. Indian stocks fell for the worst performance in Asia on the day.

Unusually, Reserve Bank of India (RBI) governor Duvvuri Subbarao gave fairly explicit policy guidance, saying the central bank might ease policy in January to March, the final quarter of the fiscal year, when it expects inflationary pressure to ease. That implied it will not cut rates at its next review on December 18.

"There's a positive that RBI has said there's a likelihood of easing in the Jan-March quarter. Looks like the RBI wants inflation to peak out before cutting rates, so we shouldn't expect anything in December," said A Prasanna, economist at ICICI Securities Primary Dealership in Mumbai.

The central bank said it expects inflation - which hit a 10-month high of 7.8 per cent in September - to rise before easing in the final quarter of the fiscal year.

"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.

Investors, companies and the government have clamoured for a cut in interest rates to boost flagging growth. India's interest rates have been on hold since April even as many other central banks cut rates, and remain some of the highest anywhere.

"Growth is as much a challenge as inflation," Chidambaram said after the rate announcement. "If government has to walk alone to face the challenge of growth, well, we'll walk alone," he said.-Reuters




Tags: repo rate | Rates | pressure | RBI | Indian central bank |

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