RBI tipped to keep rates on hold

MUMBAI: The Reserve Bank of India is set to keep interest rates unchanged on Tuesday, opting to support a nascent economic recovery and leaving the job of tackling rising inflation until later, economists say.

Inflation over 12 months accelerated to more than 1 per cent for the week ended October 10, official data showed last Thursday, fuelling speculation the bank may soon increase rates or at least prepare the markets for a move.

Higher prices caused by increasing food costs after a poor monsoon, along with the fragile economic recovery, has confronted the central bank with a dilemma about when to take the first steps to tighten policy.

Most expect a rate hike towards the end of the year or in early 2010, though the central bank might opt to drain some liquidity from the banking system on Tuesday by hiking the cash reserve ratio - the percentage of funds banks must hold in reserve.

The Reserve Bank of India is expected to make a statement at 1115 am (0545 GMT) after the half-year monetary policy review.

RBI governor Duvvuri Subbarao will speak to the media later on Tuesday.

"The Reserve Bank will not change policy rates, but will make an effort to prepare the system on a move to exit from its expansionary monetary policy," said an economist at state-run Bank of Baroda, Rupa Rege Nitsure, commenting on the meeting.