By Suvashree Choudhury and Rafael Nam
MUMBAI (Reuters) - The Reserve Bank of India (RBI) sent a strong signal on Tuesday that it will refrain from cutting interest rates until it is confident that consumer inflation can be reduced to a target of 6 percent by January 2016.
The RBI policy review statement reinforced Governor Raghuram Rajan's commitment to tame inflation in a country that has long struggled with prices rising at double digit levels annually, causing most distress for the country's poor.
(Also read, Expert views on RBI's monetary policy, click https://bsmedia.business-standard.comin.reuters.com/article/2014/09/30/india-economy-rbi-rates-experts-idINKCN0HP0EJ20140930)
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The RBI kept its key policy repo rate unchanged at 8.0 percent, as widely expected, and also left its main liquidity levers - the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) - untouched.
Warning of upside risks to its 2016 inflation target, the RBI said policy moves would hinge on inflation trends.
"This continues to warrant policy preparedness to contain pressures if the risks materialise," the RBI statement said. "Therefore, the future policy stance will be influenced by the Reserve Bank's projections of inflation relative to the medium term objective (6 per cent by January 2016), while being contingent on incoming data."
Consumer price inflation slowed to 7.8 percent in August, making the RBI far more confident that the near-term target of 8 percent inflation in January would be met.
In a separate report on inflation, the RBI spelled out its concerns for the future, noting elevated inflation expectations among households and an enduring risk of higher food prices because structural issues were taking time to solve.
The central bank projected inflation to ease to 6 percent by November but soon rise to around 8 percent by January through March 2015 as a favourable base effect is likely to reverse.
A Reuters poll last week showed most analysts expect the RBI will not cut interest rates until the April-June quarter.
"The key takeaway is that the central bank is now focused on achieving the 6 percent inflation target rather than the 8 percent target," said Soumyajit Niyogi, an analyst for SBI DFHI Primary Dealership.
ECONOMY TO GROW FASTER
Investors in India's bonds are happy with the priority Rajan gave to breaking the "back of inflation" in a speech last week. And, on Tuesday, the benchmark 10-year paper was down 1 basis point to 8.48 percent from its previous close.
Filled with hope by the election of Prime Minister Narendra Modi last May, investors in India's booming stock market have been undeterred by the high interest rates.
The new Modi government has backed Rajan, though the RBI's strategy is far less popular with businesses, which want relief from high interest rates, and banks which want to lend more.
The RBI on Tuesday reiterated its economic growth projection at 5.5 percent for 2014/15 and said it expects the economy to grow 6.3 percent in 2015/16.
Modi's reformist government will want more priority to be given to boosting economic growth, but it will have to play its part by remedying structural issues that create supply bottlenecks, and by reducing its fiscal deficit.
In the absence of rate cuts, all the RBI has offered so far this year to help growth has been modest measures to make more credit available.
Ultimately, India needs far stronger investment if it is to decisively recover from the sub-five percent growth suffered in the past two years, and grow fast enough to provide jobs for the millions of young people entering the labour market.
(Additional reporting by Mumbai markets team; Editing by Simon Cameron-Moore)