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RBI Keeps Interest Rates Unchanged

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The Reserve Bank of India (RBI) left its key interest rates unchanged 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 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 per cent and also kept the banks' cash reserve ratio (CRR) steady at 4.25 per cent, its lowest since 1974.
"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 per cent from levels before the decision, after initially gaining 1 bp, as the RBI signalled a shift to focus on growth, raising expectations for a rate cut as early as January.
However, the BSE Sensex fell 0.2 per cent 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 per cent 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 per cent in November from a year earlier prompting some economists to bring forward their rate cut expectations.
"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 Reserve Bank of India wrote in its mid-quarter monetary policy review.
"The policy is benign. I think the RBI will begin the easing cycle with a CRR cut in the January policy, said Sujan Hajra, chief economist, Anand Rathi Securities, Mumbai. "The first rate cut will come in February-March and I expect cumulative 75 basis points of repo cuts by June."
Expert Views:
Leif Esken, chief economist for India and Asean, HSBC, Singapore
"The Reserve Bank of India did not see a need to cut the cash reserve ratio at this point, which is a little bit of a surprise. But otherwise their action is in line with expectations.
"They have re-emphasised their earlier guidance of possible easing in the last quarter of the fiscal year. I think there is still limited room to cut rates. Structural reforms and a revival of investment in infrastructure would be needed to revive growth."
Arvind Chari, fixed income fund manager, Quantum Asset Management, Mumbai
"The lack of a CRR cut means that OMOs (open market operations) will continue, which is extremely supportive of bond prices. The text suggests that the January policy should see a repo rate cut, so it makes sense to continue to remain long bonds. We were a bit disappointed by not seeing a rate cut today. Given that the overall trend is towards easing, there was no major reason to wait for the January policy."
Shubhada Rao, chief economist, YES Bank, Mumbai
"While we definitely expected liquidity injection through more calibrated moves based on government spending, open market operations would still be the preferred route. So basically we are anticipating a rate cut in January by 25 basis points and in March by 25 bps and going into the next fiscal year, we are expecting 50-75 bps additional rate cuts.
"If the government keeps a very tight lid on spending in the rest of the fiscal year, we could see a CRR move, but given the sticky nature of government expenditure, it would still be the OMO route for liquidity injection."
Abheek Barua, Chief Economist, HDFC Bank, New Delhi 
"I had expected a CRR cut but there was no compelling reason to do so. 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 rate cut strengthening, which they could do in January.
"There is still some uncertainty on government's borrowing, and they could borrow additionally in the last quarter, which could create a situation of tight liquidity and RBI could save for a CRR cut until then.I think today's move reinforces the expectation of more open market operations, which is a bond positive."
Radhika Rao, Economist, Forecast PTE, Singapore
"Last week's sub-consensus November WPI had fanned speculation in some quarters that the RBI might lower the key rate today, though we reckon that a cut at this stage would have been premature given the scope for these prints to be revised higher in coming months.
"That said signs in softening RBI guidance is apparent as focus has shifted to growth and odds for a rate cut in Jan-March quarter is likely to gather considerable momentum here on. Barring a sharp acceleration in December WPI, we look for a 50 basis points reduction in Q1 2013, possibly front-loaded in the January meeting."
Anubhuti Sahay, Economist, Standard Chartered Bank, Mumbai
"The RBI has struck a cautious note even as it acknowledged moderation in inflation. We expect RBI to reduce repo rate by 25 basis points in Q1 2013 as moderation in the inflation trajectory is likely to be confirmed by then."
A. Prasanna economist, ICICI Securities Primary Dealership Ltd, Mumbai
"I think it's slightly more dovish than the October policy, driven by lower than expected inflation. They are still concerned about growth. My expectation is of cut in CRR and the repo rate by 25 basis points in January and another repo rate cut of 25 bps in March.
"They have said they will continue to provide liquidity and that implies OMO will continue. We expect another 500 billion rupees through OMOs until March.
"We are not sure about additional borrowing, because even if there is some slippage to the 5.3 per cent fiscal deficit target, it can be managed through additional T-bills."
Rupa Rege Nitsure, chief economist, Bank of Baroda, Mumbai
"In line with our expectations, the RBI did not ease monetary policy today citing elevated level of retail inflation. But the language has certainly become more dovish and the probability of a rate cut in January has gone up."
Shakti Satapathy, analyst, AK Capital, Mumbai
"Today's announcement was mostly in line with the previous tone of the policy. Given growth supportive fiscal stance taken in the recent days by the central government along with ebbing inflationary pressure from the coming months, the RBI would seek a proactive 50 bps repo cut in the January policy.
"With almost all the negativity priced in and continuation of timely OMOs, the government bond yields would be on a downward bias in the coming weeks."
Arun Singh, senior economist, Dun & Bradstreet, Mumbai
"Today's action shows the Reserve Bank of India's seriousness in fighting inflation. The ideal time for the central bank to cut rates will be the end of January, provided there are no surprises on the inflation front. "I think there will be a 25 to 50 basis points cut in the repo rate in the March quarter."
Upasna Bhardwaj, Economist, ING Vysya Bank, Mumbai
"RBI's forward guidance seems fairly pro-growth, further reinforcing our view that the central bank will ease repo rate in the January meeting. We expect a total 50 bps rate cuts in the March quarter."
Anjali Verma, economist, MF Global, Mumbai
"The tone of the policy warranted a CRR cut. The liquidity deficit is about 3 per cent of bank deposits. OMOs will most likely continue to come, but does not ease the liquidity situation much.
"I think the policy today reinforces a 25 bps repo cut in January. I expect 50-100 bps of cumulative rate cuts in 2013."
Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance, Mumbai
"It's another disappointing policy against hopes of a CRR cut and a long shot of a rate cut, but RBI may act in January though. One good thing is markets are seeing buying at lower levels."
Market Reaction
* The benchmark 10-year bond yield fell 3 bps to 8.14 per cent after rising 1 basis point to 8.17 per cent immediately after the policy.
* The rupee trimmed gains to trade at 54.79/80 from 54.76/77 after the policy decision.
* The benchmark 5-year OIS rate rose 4 bps to 7.15 per cent while the 1-year OIS rate firmed 6 bps to 7.67 per cent.
* The BSE Sensex dropped 0.4 per cent in a knee-jerk reaction after the policy. It had pared most gains and was flat just before the announcement.