India's central bank is expected to hold interest rates: analysts

The inflation rate accelerated to more than one percent for the week ended October 10, official data showed last Thursday, fuelling speculation the bank may act to curb mounting price pressures.

Higher prices caused by increasing food costs after a poor monsoon, along with the fragile economic recovery, has confronted the central bank with a dilemma about when to take the first steps to tighten monetary policy.

“The RBI (Reserve Bank of India) has been reiterating its priority to support growth despite brewing domestic inflationary pressures,” said Siddhartha Sanyal, economist with Edelweiss Securities.

“It will abstain from hiking rates and will continue to pursue accommodative policy rates for the rest of the year while gradually chalking out a path towards a likely exit' from expansionary measures,” Sanyal added.

Some economists believe there is a chance the bank might opt to drain some liquidity from the banking system as a first step to tame inflation by hiking the cash reserve ratio — the percentage of funds banks must hold in reserve.

Deepak Lalwani, India director at London-based brokerage Astaire and Partners Ltd, said there was about a 40 percent chance of this happening and that Tuesday's decision would bring a change in tone.

“We expect the central bank's comments to turn hawkish as it signals to the markets the next move for interest rates is up,” he said.

The RBI governor Duvvuri Subbarao struck a more hard-line tone on prices earlier this month saying “inflationary pressure (in India) is a more urgent concern” than elsewhere.

But at the same time, he added the bank “will not exit from the accommodative monetary policy unless we are assured recovery is secure.”

The bank is expected to make a statement at 0545 GMT after the half-year monetary policy review.

The government and industry have been vocal in saying rates should stay steady until the next fiscal year in order not to choke off a fragile recovery.

The RBI has cut interest rates six times since October 2008 with the repo -- the rate at which it lends to commercial banks -- now at a record low of 4.75 percent.

The reverse repo, the rate at which it borrows from banks, is also at a record low, of 3.25 percent.

Between November 2008 and March this year, the government introduced three stimulus packages to help revive the economy as demand for goods and services was hit by the global slowdown.

The central bank expects growth of “around 6.0 percent” for the current fiscal year.

“The Reserve Bank will not change policy rates but will make an effort to prepare the system on a move to exit from its expansionary monetary policy,” Rupa Rege Nitsure, economist at state-run Bank of Baroda, said.

In October, the latest economic data showed India's industrial output jumped 10.4 percent in August year on year, its fastest rate in 22 months.

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