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RBI seen keeping rates steady in Sept

September 03, 2012

Reserve Bank of India's logo — Reuters Photo

MUMBAI: India's central bank is expected to keep its key interest rate steady this month, a Reuters poll showed, and economists see only a slight easing this calendar year, pointing to hawkish comments from policymakers concerned over high inflation.

A marginally higher-than-expected gross domestic product growth in the first quarter of this fiscal year reported last week gives additional room to the Reserve Bank of India to hold rates steady for a fifth straight month.

Of the 21 analysts polled, 19 see the repo rate unchanged at eight per cent at the mid-quarter review on Sept 17, in line with expectations in a previous poll in July. But the median estimate for the policy rate at December-end is now 7.75 per cent, higher than 7.50 per cent previously forecast.

“Given the recent comments of the RBI governor Subbarao that inflation management is key priority, and with better than expected GDP print, we expect RBI to hold on to rates,” said Anubhuti Sahay, an economist at Standard Chartered Bank.

“If the GDP print would have fallen below five per cent, then there could have been pressure on the RBI to cut rates.” RBI Governor Duvvuri Subbarao last week said inflation remained too high and needed to fall further or risk more damage to the economy.

The country's wholesale inflation unexpectedly dropped to 6.87 per cent in July from 7.25 per cent in June, but non-food manufacturing inflation, a key concern for the RBI, rose to 5.44 per cent from 4.9 per cent.

The Reuters poll also showed a further scaling back of full-year growth projections for Asia's third largest economy, with the median estimate at 5.7 per cent for fiscal 2012/13, compared with 6.3 per cent in the July poll.

Data released last week showed India's GDP grew 5.5 per cent in April-June, slightly higher than 5.3 per cent in the previous quarter, driven by a rebound in construction and financial services.

The RBI has refused to lower interest rates since its surprise 50 basis point cut in April despite slackening growth, citing need for the government to free up supply constraints that have pushed up food prices, and launch fiscal reforms.

Economists — except for one — ruled out a cut in banks' cash reserve ratio (CRR), or the amount of deposit the lenders have to maintain with the central bank, because of easy liquidity conditions.