RBI keeps rates on hold, maintains easy stance

By Rafael Nam and Suvashree Choudhury

MUMBAI (Reuters) - The Reserve Bank of India (RBI) kept interest rates on hold at 7.50 percent on Tuesday, waiting to assess inflationary pressures and give banks more time to reflect its previous cuts in their lending rates.

India's largest bank, State Bank of India , moved within hours to trim its base lending rate, becoming the first major player to do so since the RBI began its current round of cuts earlier this year.

In a statement after Tuesday's policy review, the RBI said it would maintain an "accommodative stance" but cited risks, raising some uncertainty about when it would cut rates next.

(To read what experts say about the RBI's decision to hold rates, click here)

Governor Raghuram Rajan said he did not expect RBI thinking to be blown off course by the prospect of the U.S. Federal Reserve raising rates. While a Fed move could attract capital away from some emerging markets, the Indian rupee has remained firm against other currencies thanks to strong inflows.

"We feel we are adequately buffered. That is not going to be the key factor in determining our monetary policy stance going forward," Rajan said in a news conference.

The RBI has cut rates twice this year, by a total 50 basis points, to bolster the economy, making both moves outside of the regular policy reviews.

Rajan voiced impatience that only a few banks had cut their lending rates, and dismissed bankers' claims that the cost of funds remained too high.

State Bank of India cut its base lending rate by just 15 basis points, although its move spurred others, including HDFC Bank . ICICI , India's largest private sector bank, cut by 25 basis points.

EYE ON THE WEATHER

Most of the 40 economists surveyed by Reuters had expected RBI to keep the main repo rate unchanged for now and lower it once more by the end of June. The next policy review is on June 2.

Whether consumer inflation stays within its target of 2 to 6 percent will be crucial, though the RBI has also said it needs Prime Minister Narendra Modi's government to control its fiscal deficit and push economic reforms.

The consumer price index rose 5.37 percent in February, its fifth month running within the RBI's target range. March data is due on April 13.

The RBI projected CPI would stay at current levels in the April-June quarter, and fall to around 4 percent by August, but rise to 5.8 pct by the end of the year.

As ever in India, much depends on the impact of the weather on food prices. Heavy rainfall last month pushed up prices for winter crops such as wheat and pulses.

The RBI will also be wary of the potential for tensions in the Middle East to force oil prices higher.

The focus on inflation reflects the RBI's more targeted approach under Rajan.

The RBI on Tuesday reiterated its target of 6 percent CPI by January 2016 and set a new target of 4 percent by the end of 2017/18, the midpoint of the CPI range.

It projected economic growth of 7.8 percent in the 2015/16 fiscal year, using methodology adopted by the government earlier this year that has raised scepticism among analysts. The government predicts 8.0 to 8.5 percent growth.

"For the rest of the year, one can expect 25-50 bps (rate) cut, but timing is a tough call," said R. Sivakumar, head of fixed income for Axis Asset Management.

(Reporting by Rafael Nam and Suvashree Dey Choudhury, additional reporting by Neha Dasgupta and Swati Bhat; Editing by Ruth Pitchford; Editing by Simon Cameron-Moore)