RBI seen hiking rates again in Oct to cement hawkish inflation stance - Reuters poll

By Sumanta Dey

BANGALORE (Reuters) - The Reserve Bank of India will likely raise its lending rate further on Tuesday, cementing its inflation-fighting credentials despite the country's sputtering economic growth, a Reuters poll showed.

Twenty-nine of 41 economists polled this week expected the central bank will increase the policy repo rate by 25 basis points (bps) to 7.75 percent when it meets on Oct 29.

The median consensus also showed the marginal standing facility, an overnight borrowing rate, would be cut by an equal measure, narrowing the gap between the two lending rates to 100 basis points, which has long been the default setting.

RBI Governor Raghuram Rajan said last month he intended to continue withdrawing liquidity tightening steps put in place this summer to stabilise the slumping Indian rupee. Those measures included a 200 basis point increase in the MSF rate in July.

The MSF rate was cut by 50 basis points to 9.0 percent on October 7 as the rupee clawed back some ground after hitting record lows in August.

"Rajan has been fairly hawkish on inflation and he has also gone to the extent of saying that even if tackling inflation comes at a short-term trade off with growth, he would go for it," said Upasna Bhardwaj, an economist at ING Vysya Bank.

"His school of thought also says that tackling inflation should be the primary mandate of a central bank."

The RBI surprised markets last month by increasing interest rates to 7.50 percent, acknowledging inflation pressures and establishing the central bank's resolve in fighting it, even at the expense of slower growth.

Indeed, India's economic growth will remain under pressure well into next year owing to weak domestic and global demand, while headline inflation will remain elevated, a separate Reuters poll showed this week.

Wholesale price inflation ticked higher to 6.46 percent in September, well above the RBI's commonly perceived comfort level of 5 percent.

Most of the increase was attributed to soaring food prices. Still, economists said Rajan will likely tackle it by raising interest rates, rather than wait for prices to cool after a good monsoon this year.

If the RBI raises the repo rate next week, economists do not expect another increase through March 2015, providing inflation shows some signs of moderating.

"At the moment we expect a pause (after next week's anticipated rate rise), but if the inflation situation changes we will have to revisit that view," said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai.

"I would not rule out a change in policy rates going forward. For now we think inflation will continue to inch up and then decline a little because food inflation will come down and also because of exchange rate stability."

The poll also showed the RBI is unlikely to change the cash reserve ratio (CRR) at its meeting, holding it at 4.0 percent.

Commercial banks in India have called for the central bank to reduce the reserve requirement with an aim to abolish it, arguing that the cash earns no interest and is unproductive.

But the reserve provides a key liquidity management tool for the central bank and it has so far only reduced the CRR in measured steps.

"The fact that banks are clamouring for it makes it all the more reason for the central bank not to do it," said Robert Prior-Wandesforde, director of Asia economics at Credit Suisse.

"The CRR, by Indian standards, is very little. It is the lowest it's been for a very long time. I don't think Rajan is ready yet to signal a more accommodative stance by reducing it."

Twelve economists in the poll predicted the RBI will stay put and not hike the repo rate at its Tuesday review, saying the uptick in inflation last month was due to higher food prices, which they expect will ease gradually.

(Polling by Ashrith Doddi and Hari Kishan; Editing by Kim Coghill)

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Tepid U.S. job growth supports Fed's cautionary stance

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. employers added far fewer workers than expected in September, suggesting a loss of momentum in the economy that would likely add to the Federal Reserve's caution in deciding when to trim its monthly bond purchases.

Nonfarm payrolls increased 148,000 last month, the Labor Department said on Tuesday. While the job count for August was revised to show more positions created than previously reported, employment gains in July were the weakest since June 2012.

Economists polled by Reuters had expected the economy to add 180,000 jobs in September.

"This report on the labor market will soften people's assessments of current conditions," said Cary Leahey, a senior economist at Decision Economics in New York.

But there was some silver lining in the report, with the unemployment rate dropping a tenth of a percentage point to 7.2 percent, the lowest level since November 2008.

The jobless rate is derived from a separate survey of households, which showed an increase in employment last month.

U.S. Treasury debt prices rose on the report, while the dollar fell against the euro and the yen.

The closely watched monthly employment report was released more than two weeks later than originally scheduled because of the partial shutdown of the federal government earlier this month.

Signs the economy lost steam even before the acrimonious budget fight could convince the Fed to hold off any decision on scaling back its bond buying until the extent of the economic damage from the fiscal standoff is clear.

Economists estimate the 16-day government shutdown shaved as much as 0.6 percentage point off annualized fourth-quarter gross domestic product, through reduced government output and damage to both consumer and business confidence.

Fed officials will meet next week to discuss monetary policy, on October 29-30. They surprised markets last month by sticking to their $85 billion per month bond-buying pace, saying they wanted to see more evidence of a strong recovery.

Now, many economists think the Fed will hold off on scaling back economic stimulus until next year.

"With the possibility of a replay of the budget showdown as early as mid-January, why would the Fed want to pull any levers now? It's hard to expect any tapering of the Fed's bond purchases until the budget mess straightens itself out," Leahey said.

There are fears lawmakers will engage in another bruising round early next year when Congress must agree on a budget to fund the government and once again raise the nation's borrowing limit.

Employment gains in September were mixed last month, with government payrolls increasing 22,000 jobs after rising 32,000 in August. Both state and local governments added jobs last month, offseting the decline in federal employment.

There was surprise weakness in the leisure and hospitality industry, which has been adding jobs consistently over the past years. The industry shed 13,000 jobs, the most jobs since December 2009.

The information sector failed to recoup all the jobs lost in August as the motion picture industry shed workers, with payrolls only rising 4,000 last month.

But there was good news in the construction industry, where payrolls increased 20,000, which could ease fears of a leveling off in home building. Construction employment had barely increased over the prior two months.

The manufacturing sector added a meager 2,000 jobs as automobile assemblies shed some jobs. Retail employment increased 20,800, slowing somewhat from the solid gains seen for much of this year.

Average hourly earnings increased three cents in September. They have risen 49 cents or 2.1 percent over the past 12 months. The length of the average workweek held steady at 34.5 hours.

(Reporting by Lucia Mutikani; Additional reporting by Ellen Freilich in New York; Editing by Andrea Ricci)

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