CORRECTED-India central bank lauds reforms, says more needed

Last Updated: Mon, Oct 29, 2012 13:20 hrs

(Changes date of poll from last week to Oct. 19; changes date in dateline)

MUMBAI, Oct 29 (Reuters) - India's central bank said the government's reform efforts are a move in the right direction but said swift implementation and further measures are needed, and warned that inflation remains a risk, a day before it is expected to keep interest rates on hold.

Still, the central bank's language was less hawkish than in the recent past, as it said inflation pressure is likely to moderate starting in the January-March quarter, a sign it may soon be ready to ease policy interest rates after leaving them unchanged since April.

"As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns," the Reserve Bank of India wrote in its review of macroeconomic and monetary developments for the July-September quarter.

The twin deficits refer to India's fiscal and current account deficits.

While most economists in a Reuters poll on Oct. 19 said they did not expect the RBI to cut its policy repo rate on Tuesday, nearly half forecast that it would cut the cash reserve ratio, or the share of deposits banks must maintain with the central bank.

The RBI said its survey of professional forecasters had lowered its median growth forecast for the fiscal year that ends in March to 5.7 percent from 6.5 percent previously, and lifted its average wholesale price index inflation forecast for the fiscal year to 7.7 percent from 7.3 percent.

"A credible fiscal consolidation strategy is now on the anvil but needs to be backed by further measures," the RBI said.

Earlier on Monday, Finance Minister P. Chidambaram pledged to nearly halve India's fiscal deficit by March 2017 in a bid to avoid a credit rating downgrade and persuade the central bank to cut rates to help the ailing economy, but offered few concrete steps to meet the ambitious target.

Higher spending on fuel, food and fertilizer subsidies along with sluggish tax revenues has led many economists to forecast a fiscal deficit in the current fiscal year of about 6 percent of GDP. Chidambaram said India's fiscal deficit would come in at 5.3 percent of GDP, up from New Delhi's earlier target of 5.1 percent.

In September, wholesale price index inflation rose a faster-than-expected 7.8 percent from a year earlier, on higher fuel prices, and economists expect it to remain near 8 percent for the next couple of months.

India has taken several recent measures to bolster investment and ease its fiscal deficit, including raising the price of subsidised diesel and easing foreign direct investment in several industries, including supermarkets and airlines.

"The announcement of these reform measures in themselves are not sufficient to ensure recovery as their impact would critically hinge on successful implementation," the RBI wrote. (Reporting by Shamik Paul and Tony Munroe)

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