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By Swati Bhat
MUMBAI - The Reserve Bank of India is likely to keep monetary policy accommodative without cutting interest rates at a policy meeting on Thursday, economists said, as inflation is above target and the economy has shown possible signs of recovery from its worst slowdown in more than a decade.
The central bank's monetary policy committee (MPC) cut rates by 135 basis points over five straight meetings last year, before surprising markets in December by holding the policy repo steady at 5.15% due to growing concerns over inflation.
A Reuters poll of economists, conducted before the federal budget on Feb. 1, showed the central bank is expected to keep the repo rate unchanged until at least October, when it is seen resuming its easing path.
The RBI is now forecast to next cut rates by 25 basis points to 4.90% in the October-December quarter, though some analysts reckon the central bank will keep rates on hold for longer.
"Right now inflation is the main concern. We expect RBI to hold rates on Thursday and see them pausing in April as well," said A. Prasanna, economist at ICICI Securities Primary Dealership.
"I think the stance will remain accommodative and MPC will keep the option of one more rate cut open," he added.
Data released after the MPC's December meeting fuelled even more concern as annual retail inflation surged to 7.35% in December, mainly driven by food prices, its highest level in more than five years.
The RBI is mandated to keep the headline inflation rate within the broad range of 2%-6% while it targets medium term inflation at 4% levels.
Economists had previously drawn comfort from subdued core inflation, a figure they estimate for themselves as it is not given by the statistics department. Five economists spoken to immediately after the release of the December inflation data had put core inflation, which strips out volatile food and fuel prices, in a range or 3.7% to 4.2%.
But the government's economic survey, released on the eve of the budget, suggested they should pay most heed to the headline inflation figure.
"There is convergence of headline inflation towards core inflation," the survey noted. "Owing to the large weightage of food and fuel in the consumption basket of consumers in India and the fact that demand-side pressures and not just supply side factors are important for food and fuel inflation, focus on headline inflation for monetary policy decisions may be warranted".
Radhika Rao, economist with DBS Bank in Singapore, expected the policy rate to stay unchanged this year.
"Given the supply-driven nature of the price spurt and likelihood of a gradual pullback over the next two quarters, we expect the RBI to retain an accommodative stance while keeping rates on hold," Rao said.
"Transmission of last year's cuts remains central to the policy direction, with directed special OMOs (open market operations) undertaken to temper the longer tenor bond yields."
For all the gloom over India's economy, a private survey released on Monday showed manufacturing activity expanded at its quickest pace in nearly eight years in January with robust growth in new orders and output.
The government's budget gave only limited support to a recovery in economic growth, with proposals got only moderate spending increases and small cuts in personal taxes.
(Reporting by Swati Bhat; Editing by Simon Cameron-Moore)