Reserve Bank of India kept the key interest rates unchanged but hinted easing of rates in January saying with decline in inflation, the focus of monetary policy would shift to removing impediments to growth.
Overlooking demands of the industry and the bankers, the RBI left the short-term lending (repo) rate and the Cash Reserve Ratio (CRR) unchanged at 8% and 4.25%, respectively.
"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards", RBI Governor D Subbarao said in the mid-quarter monetary policy review.
The RBI is slated to announce the third quarter policy review on January 29.
The central bank is closely monitoring the evolving growth -inflation dynamics and would update projections for 2012-13 in the third quarter review, RBI said.
It said the biggest risk to outlook stems from global politico-economic developments which could delay resolute policy action.
Referring to inflation, it said, while WPI is showing some signs of moderation, retail inflation has continued to remain elevated. "The non-food component of the index also suggested persistent inflationary pressure".
Looking forward, it said, "the emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months".
The RBI said the overall WPI inflation has been below the central bank's projected level over the past two months.
The WPI inflation in November moderated to 7.24%, but retail inflation remain elevated at 9.90%.
Commenting on the policy, Chief Economic Advisor Raghuram Rajan said it is good that RBI sees room for rate cut.
"I think its good that RBI sees that there is room to ease. And clearly they are taking a decision keeping in mind that their main job is combating inflation. I look forward to good news in policy (January)," Rajan said.
The RBI said that since the Second Quarter Review in October, the global economy has shown some signs of stabilisation although the situation remains fragile.
It said that while activity is picking up in the US and the UK, near-term prospects in the euro area are still weak and there is no clarity as yet on how the US 'fiscal cliff' might be managed.
"While several emerging and developing economies are gradually returning to higher growth, weak external demand and contagion risks from advanced economies render them vulnerable to further shocks," RBI said.
On the domestic front, it said, there are some incipient signs of pick-up though growth remains significantly below its recent trend. The industrial output growth bounced back to 8.2% in October, 2012, against a contraction of 5% in the same month last year.
The Indian economy grew by 5.4% in the first half (April-September) of the current fiscal, against 7.3% in the corresponding period last year.
The RBI in its second quarter policy review had projected the GDP growth for the current fiscal at 5.8%. The Finance Ministry in its mid-year analysis has pegged the growth estimate between 5.7-5.9% for 2012-13.