RBI cuts rates for third time to put Indian growth on firmer footing

By Rafael Nam and Suvashree Choudhury

MUMBAI (Reuters) - The RBI cut interest rates for a third time this year on Tuesday, taking advantage of subdued inflation to lend more support to an economy that the bank itself says is not doing as well as latest impressive growth numbers suggest.

The Reserve Bank of India also left open the possibility of further cuts later this year, even with forecasts of a below-average monsoon that could put pressure on food prices.

(Also read what experts are saying about the RBI's decision to cut rates, click http://in.reuters.com/article/2015/06/02/india-rbi-repo-rate-experts-idINKBN0OI0EF20150602)

The quarter point reduction in the repo rate to 7.25 percent was predicted by 35 of 48 analysts polled by Reuters. Previous cuts in January and March had also been by 25 basis points.

The reduction showed policymakers recognised the need to put the economy on a sounder footing, regardless of data released on Friday that showed India outpaced China by growing 7.5 percent in the March quarter.

"We still have very weak investment. We haven't seen a strong pick-up," RBI Governor Raghuram Rajan told a newsconference, adding that there were factors to suggest that growth was weaker than the headline numbers made out.

"In general, the corporate results have been quite weak also suggesting that final demand is yet to pick up strongly."

Many economists and even Rajan himself say a new way used to calculate gross domestic product may overstate how fast India is really growing.

India's chief economic adviser, Arvind Subramanian, said the rate cut showed the economy was still in need of "policy support" as it recovered, and welcomed the move.

But while Rajan said the RBI would remain on the "disinflationary path", further easing would now depend on the outcome of India's annual rainy season and government moves to ease the pressure on food prices, which make up almost half the basket of goods used to measure inflation.

Government monsoon forecasts on Tuesday raised fears that India couldsuffer its first drought in six years.

"Going forward, room may absolutely open up if monsoon is better than expected or government action can mitigate any potential rise in food prices and if energy prices stay contained," Rajan said, vowing to "take full advantage".

Analysts have been split about whether the RBI would ease further. A recent Reuters poll had shown most analysts expected another 25 basis points cut between October and December.

Consumer price inflation hit a four-month low of 4.87 percent in April, well within the RBI's target range of 2 to 6 percent.

But the central bank also projected inflation would rise to 6.0 percent in January 2016, setting up the possibility of no more rate cuts this year.

NO LIQUIDITY MOVE

Despite demands from India's commercial banks, the RBI did not take steps to free up liquidity, which bankers had said were needed for them to lower lending rates further and pass on the benefits of monetary easing to the broader economy.

Instead, with growth in bank lending at its lowest in almost two decades, the RBI urged banks to reduce rates quickly.

Markets had already discounted Tuesday's cut, but weakened after a poor monsoon forecast raised questions over whether further easing would really be possible. The broader Nifty closed 2.3 percent down. While India's benchmark 10-year bonds rose 11 basis points to 7.93 percent, and the rupee weakened to 63.87 per dollar, having ended Monday at 63.72.

The RBI cut came just weeks after China made its third interest rate reduction in six months, but growth in India's giant neighbour has been slowing down.

Having embarked on an easing cycle in January, the RBI's latest move also completed a reversal of the rate increases ordered by Rajan between September 2013 to January 2014, when India was suffering double-digit inflation.

"I would characterise the policy today as neither conservative nor aggressive. In some sense, it is a Goldilocks policy: just right given the current situation," Rajan said.

(Additional reporting by Himank Sharma, Swati Bhat and Neha Dasgupta; Editing by Clara Ferreira-Marques and Simon Cameron-Moore)