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India holds rates, but signals it may cut soon

India’s central bank kept its benchmark interest rate on hold Tuesday due to inflation worries, but signalled it may cut borrowing costs soon as it shifts focus to boosting a slowing economy.

The Reserve Bank of India (RBI) kept its main lending rate at 8.0 percent, and the percentage of deposits banks must keep with the central bank — the so-called cash reserve ratio — also unchanged.

RBI governor Duvvuri Subbarao warned that “elevated food and commodity prices” remained risks.

However the bank suggested it may start easing monetary policy in the next financial quarter, which starts in January, as inflation had cooled last month to a 10-month low of 7.24 percent.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth,” the central bank said.

Subbarao also reiterated guidance given two months ago that the bank expects to be able to start cutting rates in early 2013.

“The RBI again walked the straight and narrow by staying on hold. That was prudent given the still lingering inflation risks,” said HSBC chief India economist Leif Eskesen.

But the decision to keep rates on hold was likely to disappoint the government and business leaders who had called for an immediate shot in the arm for the economy, which grew at just 5.3 percent in the quarter to September.

The government on Monday cut its growth forecast for the current fiscal year to between 5.7 and 5.9 percent, putting Asia’s third-largest economy on track for its worst annual performance in a decade.

C. Rangarajan, head of Prime Minister Manmohan Singh’s economic advisory council, said the RBI had taken a “cautious stance”.

“But there is a reiteration of the intention to move towards a more easy monetary policy beginning next year,” he told the CNBC TV-18 business channel.

The once-booming economy has slowed sharply due to high interest rates, Europe’s debt crisis and sluggish investment caused by domestic and overseas concerns about policy-making and corruption.

China, South Korea and Brazil have all cut interest rates to shield their economies from the effects of the eurozone crisis. But the RBI has kept rates on hold since April, when it cut them for the first time in three years.

Economists said the only positive note from Tuesday’s announcement was that it offered more clarity on future rate cuts.

“The (RBI) language has become more dovish and the probability of a rate cut in January has gone up,” Rupa Rege Nitsure, chief economist at state-run Bank of Baroda, told AFP.

Indian shares fell after the RBI announcement, but then recovered to gain 0.59 percent to 19,358.79 points on optimism about future rate cuts.