India's central bank sent a strong signal on Friday that its next move is likely to be an easing of monetary policy as risks to economic growth increase, but left its policy rate on hold at a three-year high as it acknowledged high inflation. As expected, the Reserve Bank of India opted to pause an aggressive tightening cycle that involved lifting rates 13 times since March 2010, as the Indian economy tussles with a worrying combination of weak growth and high inflation.
The RBI held its policy repo rate at 8.5 percent in the wake of data two days ago that showed November wholesale price index inflation held above 9 percent for the 12th month in a row. However at 9.11 percent, it fell from 9.73 percent a month earlier. "While inflation remains on its projected trajectory, downside risks to growth have clearly increased," the RBI said in a statement, adding that inflation risks remained high and a slump in the rupee was also exerting price pressures.
In late October, the RBI said further rate hikes might not be warranted, and reiterated that view on Friday. "From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth," it said. The RBI left the cash reserve ratio, the percentage of deposits banks must maintain with the RBI, unchanged at 6 percent despite market speculation that it might cut the ratio in order to bolster liquidity.
"It is pretty clear that they are now shifting towards growth, but it's not a complete move," said Anubhuti Sahay, an economist with Standard Chartered in Mumbai, who expects interest rates to be cut early in the second quarter of 2012. "But since they have said growth will be important in determining monetary policy stance, if we see more bad news on the growth front, then the possibility of rate cuts coming earlier is there," she said. The RBI did not announce new measures to bolster liquidity in the money markets, although it has been buying back bonds and said it would continue to do so.
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