Mumbai: The Reserve Bank on Tuesday decided to keep key interest rates unchanged but provided sufficient hints that it would reduce them in January, giving some comfort to industry and banks which have been clamouring for a rate cut for quite some time.
"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to threats to growth from this point onwards," RBI Governor D Subbarao said in the mid-quarter monetary policy review.
The Reserve Bank of India (RBI) left the short-term lending (repo) rate and the cash reserve ratio -- the amount of deposits banks have to park with RBI-- unchanged at 8 percent and 4.25 percent, respectively.
RBI said that it is closely monitoring the evolving growth-inflation dynamics and it is likely to ease monetary policy in the January-March quarter.
The third quarter review will be unveiled on January 29.
Bankers felt that RBI would keep the promise and cut key interest rates next month giving them a leeway to pass on the benefits to retail consumers and corporates.
"I don't think banks will change their lending or deposit rates at the moment," Oriental Bank of Commerce CMD S L Bansal said, adding banks would consider a rate cut once RBI softens monetary stance.
HDFC Vice-chairman and CEO Keki Mistry said: "We will see lower interest rates in 2013. I expect RBI to cut rates by 0.50 percent before March and more rate cuts from April."
As regards the corporate sector, industry chambers expressed disappointment but took satisfaction from RBI's guidance that the central bank would consider a rate cut in the January policy review.
Commenting on the policy, Chief Economic Adviser Raghuram Rajan said it is good that RBI sees room for rate cut.
"I think its good that RBI sees that there is room to ease. And clearly they are taking a decision keeping in mind that their main job is combating inflation. I look forward to good news in policy (January)," Rajan said.
"But they (RBI) also have some incentive to seek growth in the country," he said.
Ficci President Naina Lal Kidwai said: "...Disappointing, industry is crying out for an impetus for investment and growth and lower interest rates would be oxygen to the sentiment which is beginning to turn positive."
Asserting that RBI has its own constraint, Commerce and Industry Anand Sharma said: "There is, of course, a positive side that India has an independent regulator RBI which is not listening both to myself and finance minister but we expect them to."
Sharma said: "We are hoping that after major decisions the government has made which has boosted investors morale and confidence, RBI will be less conservative."
On inflation, the RBI policy review said that WPI inflation is showing some signs of moderation.
"Lquidity conditions will be managed with a view to supporting growth...Thereby preparing the ground for further shifting the policy stance to support growth," it said.
The RBI said that since the Second Quarter Review in October, the global economy has shown some signs of stabilisation although the situation remains fragile.
Lauding the government's recent policy initiatives, the RBI said, "further reforms should help to boost business sentiment and improve the investment climate".
In its mid-year economic analysis for 2012-13, the Finance Ministry while projecting the GDP growth for current fiscal at 5.7-5.9 percent, had pitched for supportive monetary and fiscal policies to improve investor confidence.
The central bank has kept its policy rates on hold since April when it had last lowered the repo rate by 0.50 percent.
As regards inflation, the RBI said, "The non-food component of the index also suggested persistent inflationary pressure".
The WPI inflation in November moderated to 7.24 percent, but retail inflation remain elevated at 9.90 percent.
Looking forward, it said, "The emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months."
It said the biggest risk to outlook stems from global politico-economic developments which could delay resolute policy action.
"While several emerging and developing economies are gradually returning to higher growth, weak external demand and contagion risks from advanced economies render them vulnerable to further shocks," RBI said.
On the domestic front, it said, there are some incipient signs of pick-up though growth remains significantly below its recent trend. The industrial output growth bounced back to 8.2 percent in October, 2012, against a contraction of 5 percent in the same month last year.
The Indian economy grew by 5.4 percent in the first half (April-September) of the current fiscal, against 7.3 percent in the corresponding period last year.
The RBI in its second quarter policy review had projected the GDP growth for the current fiscal at 5.8 percent.
The mid-quarter review of the economy said, "both fiscal and monetary policy, however, would need to be supportive to sustain investor confidence. The government will also have to address the concerns relating to structural supply side bottlenecks".