Tue, 18 Dec 2012 10:15:25 GMT | By Reuters

RBI seen defying rate cut calls despite easing inflation

In doing so, the central bank has repeatedly resisted pressure from the finance ministry to cut rates to prop up an economy

RBI seen defying rate cut calls despite easing inflation (© Reuters)

Mumbai:The Reserve Bank of India (RBI) is expected to keep interest rates on hold despite government pressure for a cut, sticking to its guidance that it will not ease monetary policy before early next year as cooling inflation is still too high for comfort.

The RBI has kept its key borrowing rate at 8 percent since April, defying calls from business and politicians to do more to cushion the economy from a downturn that has dragged it towards its slowest growth rate in a decade. Despite signs that price pressures are moderating, the RBI is expected to wait for more clarity on the inflation trajectory before resuming rate cuts, 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.

Instead, the RBI may deliver a cut in the cash reserve ratio (CRR), a tool it has been using to manage a cash deficit and prod banks to loosen lending rates. "They might want to lag behind rather than do a rate cut now on expectation of softer inflation," said Siddhartha Sanyal, India economist at Barclays Capital in Mumbai.

"If they cut rates now then lot of open questions will arise because they had revised their inflation trajectory upwards as late as in October. That will hurt their credibility."

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