Rajan calls on government to set up monetary panel soon; holds rate

By Suvashree Choudhury and Rafael Nam

MUMBAI (Reuters) - At his last policy review as head of the Reserve Bank of India, Raghuram Rajan kept key interest rates unchanged on Tuesday to cool inflation running near two year highs, while also pushing for policy panel to be formed in time for a review in October.

The decision to hold the repo rate at 6.50 percent had been widely expected after consumer inflation accelerated to 5.77 percent in June, near the top of the Reserve Bank of India's 2-6 percent range, and above its target of 5 percent by March next year.

"It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action," RBI Governor Rajan said in his statement.

The much admired former International Monetary Fund chief economist is due to step down on Sept. 4 after a three-year term to return to academia and family living in the United States.

During that time he steered India out of its worst currency crisis in two decades and, helped by tumbling oil and commodity prices, succeeded in halving inflation from double-digit levels prevailing when he took over at the bank.

"We managed to move the needle forward a little bit," Rajan told reporters, as he looked back warmly on his time at the RBI.

Prime Minister Narendra Modi's government has still to pick a successor, while senior official told Reuters last week that candidates are being shortlisted for a six-member monetary policy committee.

Rajan had championed the introduction of an MPC, so that future rate decisions would no longer be left to the discretion of RBI governors.

The government last week formally adopted Rajan's consumer price inflation target of 4 percent with a plus or minus 2 percent band, having convinced the government that it will anchor policy in a country with a history of volatile prices.

"My hope is the next monetary policy statement (on Oct. 4) will be by the proposed Monetary Policy Committee," Rajan told reporters in prepared remarks ahead of a news briefing.

Whoever takes over from Rajan will need to follow through on efforts to clean up bad loans hobbling Indian banks, so that they can finance the investment needed if India is to hold onto its place as one of the world's fastest growing major economies.

"ACCOMODATIVE STANCE"

Rajan said the RBI's policy stance should remain "accommodative".

But he expected "upside" risks to his March inflation target, citing a hike this year in the salaries of millions of government employees and sticky core inflation.

Rajan has lowered rates by 150 bps since January last year to their lowest in more than five years, but economists doubt whether the current easing cycle has much further to run.

Most expect the next RBI governor to provide another 25 bps cut in the policy rate by the end of the year, before holding steady through 2017.

"To instigate more consumption and good credit growth, you could have RBI cutting at least once before the year end," said Sanjeev Bhasin, an executive vice president in markets for India Infoline.

In contrast to most economists, bond markets are betting the next RBI governor might take a more relaxed view on timelines to meet the 4 inflation target. Ten-year bond yields have slumped 33 bps since Rajan unexpectedly announced his departure.

(Additional reporting by Swati Bhat, Abhirup Roy, and Devidutta Tripathy in MUMBAI; Neha Dasgupta in NEW DELHI; and Aastha Agnihotri in BENGALURU; Editing by Simon Cameron-Moore)