RBI hold rates at 8.00%, cuts CRR by 25bps

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.

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.

Via – Reuters

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