No rate change in RBI8217;s policy review

RBI pauses tightening cycle that has seen it lift policy rates 13 times since March 2010.

The Reserve Bank of India has left interest rates on hold on Friday and said further rate increases may not be warranted,with future policy actions likely to respond to risks to growth.

As expected,the Reserve Bank of India opted to pause in a tightening cycle that has seen it lift policy rates 13 times since March 2010,as the Indian economy shows a worrying combination of increasing signs of weakness and high inflation.

The RBI kept its policy repo rate unchanged at 8.5 per cent at its mid-quarter review,two days after data showed November wholesale price index inflation at 9.11 per cent.

While inflation remains on its projected trajectory,downside risks to growth have clearly increased,the RBI said in a statement. 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 per cent despite market speculation that it might cut the ratio in order to bolster liquidity.

8220;I cannot really speculate on when we might start cutting rates,but certainly that is an event,that an action that is on the way forward8230;,8221; RBI Governor D Subbarao said on the sidelines of an event.

The RBI will make an assessment of its growth and inflation projections for 2011-12 in the third quarter review next month,the policy statement said.

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Bond yields fell and stocks pared gains after the policy statement,which disappointed markets by not announcing any immediate liquidity easing measures.

The RBI has been a global outlier by keeping up its fight against high inflation,lifting rates as recently as late October. Central banks in China,Brazil,Indonesia and elsewhere have begun to ease monetary policy in order to protect their economies from the impact of the euro-zone debt crisis.

The central bank is walking a very tight rope. They are battling too many challenges at the same time,be it the slowing growth,rupee and the inflation. My expectation is that the first rate cut from the central bank may not happen before March,said Jagannadham Thunuguntla,research head at SMC Global Securities.

While food inflation has dropped sharply in India,manufacturing inflation remains stubbornly high. A tumble in the rupee has added to prices pressures.

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India8217;s economic growth of 6.9 per cent in the September quarter was the slowest pace in over two years. Data on Monday showed October index of industrial output fell 5.1 per cent,far worse than expected.

The rupee dropped nearly 20 per cent against the dollar from a July peak to Thursday,adding a sense of alarm to concerns about Asia8217;s third-biggest economy. The central bank took measures late on Thursday to defend the currency.

Policy-making gridlock as the government is distracted by a series of corruption scandals and a fractious coalition has scared off investors and deterred approvals of projects needed to add capacity in an economy prone to overheating.

Analysts have been ratcheting down their growth forecasts for India,with some expecting the economy will struggle to grow 7 per cent in the fiscal year that ends in March,below last year8217;s 8.5 per cent and the government8217;s heady forecast made early in 2011 for 9 per cent growth this fiscal year.