India cuts rates after 9-month wait, RBI stays cautious

MUMBAI (REUTERS) - India's central bank lowered its key policy rate for the first time in nine months on Tuesday, but struck a cautious note on further easing as it waits to see how the government's upcoming budget aims to bring a bloated fiscal deficit under control.

The Reserve Bank of India cut the policy repo rate by 25 basis points (bps) to 7.75 percent to help support an economy set to post its slowest annual growth rate in a decade.

The RBI revised its GDP growth forecast for Asia's third-largest economy to 5.5 percent from 5.8 percent for the current fiscal year ending in March, a sharp come down for an economy that was running at near double-digit growth before the Lehman Brothers crisis.

Though respectable by other standards, the growth rate is too slow for an economy trying to support hundreds of millions of poor people, and is a worry for the ruling Congress party as it heads towards an election next year.

"It is now critical to arrest the loss of growth momentum without endangering external stability," the RBI said in its policy review.

But it went on to list constraints, notably worryingly high current account and fiscal deficits, and the risk that inflation could flare again.

Governor Duvvuri Subbarao told a news conference later that if inflation and the current account deficit moderated by more than expected there will be room to ease monetary policy.

"The message that we are trying to give is that as much as there is some space, it is going to be quite limited, and we are going to use it with a lot of judgement on timing and quantum," Mr Subbarao said.

Analysts were split on their outlook for rates, with some unprepared to forecast beyond another quarter percentage point cut, whereas Credit Suisse, in a note to clients, stood by its forecast that the repo rate will come down another 100 basis points, though perhaps not by July, as it had expected earlier.

Eyes will now fall on Finance Minister P. Chidambaram's annual budget statement due in late February, to see how the government plans to put its finances in order.

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