India holds rate steady, affirms intention to ease next year

    India's central bank held its policy repo rate unchanged at 8.0 percent, as expected, along with its Cash Reserve Ratio (CRR), but said it was still expecting to ease policy in the first quarter of next year due to lower inflationary pressures.

    The Reserve Bank of India (RBI), which has held rates steady since a 50 basis point cut in April, said lower inflation would allow it to respond to growth threats and liquidity conditions would now be managed in a way that supports growth, "thereby preparing the ground for further shifting the policy stance to support growth."

    "Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter," the RBI said in a statement, adding that there were still risks to inflation and the policy stance would remain sensitive to these risks even if the emphasis starts to shift toward supporting growth.

    India's inflation rate eased to 7.24 percent in November from October's 7.45 percent, but this remains above the 4-5 percent that the RBI is comfortable with.

    The RBI said headline inflation had been below its projected level for the past two months and the decline in core inflation was comforting, reinforcing the likelihood of a steady moderation in 2013-14 though inflation may edge higher over the next two months.

    "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 bank said.

    India's Gross Domestic Product expanded by 0.6 percent in the third quarter from the second for annual growth of 5.3 percent, slightly lower than the second quarter's growth rate of 5.5 percent.

    The RBI said there were some incipient signs of a pickup, but growth remains significantly below its recent trend and with food and manufacturing prices expected to edge down further, inflationary pressures may ease somewhat in coming months.

    The momentum in global growth is expected to firm over the rest of 2012 and 2013, but the biggest risk to the outlook is from political economy decisions in the U.S. and the euro area.

    While the RBI has held its policy rate steady since April, it has cut the CRR twice by a total of 50 basis points to 4.25 percent. The CRR is the percentage of deposits that banks have to keep with the central bank.

    In its October statement, the RBI said there was a "reasonable likelihood" of a policy easing in the January-March quarter and in early November the central bank governor said this easing may come as early as in January due to lower inflationary pressures.

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