RBI shifts focus to growth, rates on hold MUMBAI (Reuters) - The Reserve Bank of India sent a strong signal

on Friday that its next move is likely to be an easing of monetary policy as risks to economic growth increase, but left its policy rate on hold at a three-year high as it acknowledged high inflation. As expected, the RBI opted to pause an aggressive tightening cycle that involved lifting rates 13 times since March 2010, as the Indian economy tussles with a worrying combination of weak growth and high inflation. The RBI held its policy repo rate at 8.5 percent in the wake of data two days ago that showed November wholesale price index inflation held above 9 percent for the 12th month in a row. However at 9.11 percent, it fell from 9.73 percent a month earlier. "While inflation remains on its projected trajectory, downside risks to growth have clearly increased," the RBI said in a statement, adding that inflation risks remained high and a slump in the rupee was also exerting price pressures. In late October, the RBI said further rate hikes might not be warranted, and reiterated that view on Friday. "From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth," it said. The RBI left the cash reserve ratio, the percentage of deposits banks must maintain with the RBI, unchanged at 6 percent despite market speculation that it might cut the ratio in order to boost liquidity. "It is pretty clear that they are now shifting towards growth, but it's not a complete move," said Anubhuti Sahay, an economist with Standard Chartered in Mumbai, who expects interest rates to be cut early in the second quarter of 2012. "But since they have said growth will be important in determining monetary policy stance, if we see more bad news on the growth front, then the possibility of rate cuts coming earlier is there," she said. The RBI did not announce new measures to bolster liquidity in the money markets, although it has been buying back bonds and said it would continue to do so. On Thursday, the rupee was down nearly 20 percent from a July peak before the RBI took measures to defend the currency, buying rupees in the market and announcing steps to curb speculation. The plunge in the currency has added a sense of alarm to concerns about Asia's third-biggest economy. The RBI did not unveil further steps on Friday to support the currency. "I ... welcome the governor's resolve to check speculative interventions in the forex exchange markets, which among other factors has contributed to the sharp depreciation of the Indian rupee," Finance Minister Pranab Mukherjee said, adding that he expects inflation to ease in coming weeks.

Bond yields and swap rates fell after the policy statement, while the rupee edged lower to 52.80 per dollar after jumping early in the day off the back of the RBI's Thursday moves. Stocks turned sharply lower late in the day to close down 2.2 percent after hitting a twoyear low. "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," said Jagannadham Thunuguntla, research head at SMC Global Securities, who does not expect a rate cut before March. The RBI does not set a target for the rupee but does sometimes step into the market to smooth market volatility. It is constrained from mounting a more forceful defence of the rupee by the need to fund a widening current account deficit. EXCEPTIONAL INDIA The RBI had been a global outlier by keeping up its fight against high inflation, lifting rates as recently as late October. Central banks in China, Brazil, Indonesia and elsewhere have begun to ease monetary policy to protect their economies from the impact of the euro-zone debt crisis. While food inflation has dropped sharply in India, manufacturing inflation remains stubbornly high, partly the result of late from the rupee's slide. India's economic growth of 6.9 percent in the September quarter was the slowest pace in over two years. Data on Monday showed October index of industrial output fell 5.1 percent, far worse than expected , with annual capital goods output plunging 25.5 percent, a sign of dismal corporate sentiment. "When there is so much gloom and doom around, RBI should have cut the CRR by at least 0.25 percentage points," said R. Ramakrishnan, executive director of equipment maker Bajaj Electricals. Policy-making gridlock as the government is distracted by a series of corruption scandals and a fractious coalition has scared off investors and deterred approvals of projects needed to add capacity in an economy prone to overheating. "It would have given a shot in the arm to banking and the industry. It would have given the signals to everyone that it is interested in stimulating the demand and the domestic production," Ramakrishnan said. Analysts have been racketing down their growth forecasts for India, with some expecting the economy will struggle to grow 7 percent in the fiscal year that ends in March, below last year's 8.5 percent and the government's heady forecast made early in 2011 for 9 percent growth this fiscal year.