Expert views: RBI holds rates to support rupee, outlook dovish

MUMBAI (Reuters) - The RBI left interest rates unchanged on Tuesday as it supports a battered rupee but said it will roll back recent liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.

As expected, the Reserve Bank of India left its policy repo rate at 7.25 percent but took a dovish tone as it cut its growth forecast for Asia's third-largest economy to 5.5 percent for the fiscal year, from 5.7 percent previously.

It held the cash reserve ratio at 4.00 percent.

COMMENTARY

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI, MUMBAI

"The policy statement is slightly more dovish than what we had expected. The Reserve Bank of India has clearly stated that the cash tightening steps will be reversed in a calibrated manner. Supporting growth is a priority for the RBI.

"We expect that within two months, the cash tightening steps will be faded out, and monetary easing will resume. We are expecting another 50 basis points cut in the repo rate in 2013."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"Our sense is 58-59/$1 level will broadly be seen as comfort level for rupee. And, any trading above 60/$1 would once again get RBI in a cautious mode. As such, we may have to wait beyond a few weeks to see the rollback of these measures. In terms of a rate cut, I don't think there is any clear signal for a rate cut, I think status quo is likely.

"Continuing from it (RBI) said yesterday, reforms are a must, a pre-condition to be able to contain CAD. What actually gets our attention, is the statement that India should use tightening as an opportunity to narrow CAD.

"Quite clearly macro-financial stability and rupee stability have taken precedence in the policy considerations. And once there is stability growth would come back."

LINKS

Full coverage http://in.reuters.com/subjects/rbi-policy-review

RBI governor's statement http://rbidocs.rbi.org.in/rdocs/notification/PDFs/FS071301BC69D991.pdf

BACKGROUND

- India must ensure its moves to stabilise the rupee do not stifle growth, Chief Economic Adviser to the finance ministry Raghuram Rajan said on Monday, a day before the Reserve Bank of India meets on monetary policy.

- If one thing is clear from India's impulsive strategies this month to defend a plunging currency, it is that the central bank's policy bias towards supporting growth is innate, even in a crisis.

- Last week the central bank took new steps to support the rupee, signalling it will stay the course with its defence of the currency despite the risks to economic growth.

- A recovery in developed markets later this year will boost India's flagging economy, but growth will be lacklustre at best as the central bank refrains from cutting interest rates in order to keep a battered rupee currency from falling further.

- India is considering calling on its millions of non-resident citizens to help reverse a record slide in the rupee.

(Reporting by Treasury, Markets teams; Editing by Ranjit Gangadharan)