Reserve Bank of India holds rates steady

The Reserve Bank of India left interest rates on hold on Friday, pausing a tightening cycle that had seen it raise rates 13 times since March 2010, as the economy shows signs of weakness even as inflation remains high.

The RBI kept its policy repo rate at 8.5% , as expected, two days after data showed November wholesale price index inflation at 9.11%, far lower than the 9.73% clocked in October. The bank also left the cash reserve ratio at 6%. There had been speculation it might cut the ratio to bolster market liquidity.

The decision clearly reflects that inflation continues to remain their anchoring point in terms of policy decisions, and they are not averse to sacrifice some growth for this. The central bank is walking a very tight rope. They are battling too many challenges at the same time, be it the slowing growth, rupee and the inflation. My expection is that the first rate cut from the central bank may not before March.

Industrial output fell in October for the first time in more than two years as capital goods investment slumped, ramping up pressure on the central bank to ease monetary or liquidity conditions.

Production at factories, mines and utilities plunged 5.1% from a year earlier, far worse than expected.

Last Friday, India slashed its full-year growth forecast to around 7.5% and officials warned the government was      

facing a serious balance of trade problem and would have a tough time meeting its fiscal deficit target.

Annual food inflation in late November eased to 6.6%, its lowest in nearly three-and-a-half years, driven by a sharp fall in prices of vegetables and protein-rich food.