The Reserve Bank of India did not lower any of its key interest rates on Tuesday, but bankers and economists are agreed that some easing soon is inevitable. Elaborating on the third-quarter review of monetary policy for the year, governor D Subbarao said India would grow at best by only 7% in 2008-09, ending five years of 8.8% growth.

He said inflation as measured by the wholesale price index would fall to 3% by the end of March and that the global downturn would not be corrected before the end of 2009. ?There is a possibility of the economy going into deflation in the next few months. But this should not be interpreted as what is happening in other economies like Japan,? Subbarao said.

But despite the consequent need to provide low-cost funds to industry to sustain growth in such a bleak scenario, RBI decided hold off rate cuts for another day. As an interim measure, the central bank has decided that a liquidity enhancing facility given to banks to refinance credit-starved sectors like non-banking financial companies, housing finance companies and mutual funds would now operate until the end of September 2009, instead of June.

Industry chambers expecting lower interest rates to pump additional funds into reversing a sharp decline in production across sectors said they were disappointed. However, OP Bhat, chairman of the country?s largest bank, SBI, said he might lower interest rates after the RBI governor said there was enough headroom to do so.

Subbarao said banks that have not responded to his four rate reductions since October should cut lending rates to help spur growth. ?It is critical that banks expand the flow of credit to productive sectors of the economy and do so at viable rates,? he said. Since October, RBI has respectively reduced CRR, repo and reverse repo rates by 400, 350 and 200 basis points. Along with other measures, it has also released Rs 2.23 lakh crore in additional liquidity.

But commentators said rising liquidity has not helped as banks have preferred to park nearly Rs 2 lakh crore in government securities. Jehangir Aziz, chief economist at JP Morgan, said there has been some inconsistency between RBI?s language and its decision not to lower rates.

Reflecting the disappointment, an Axis bank note said the primary focus of all policy initiatives at this juncture is to make available more low-cost credit to productive sectors. ?One major enabler for this trend would be to lower the costs of funds for banks. This is where a deep cut in rates would have facilitated.?

The RBI monetary policy statement accepted that it would need to raise its money supply growth target to 19.0% from the earlier 16.5-17.0% as banks would be required to provide additional credit to make up for the drying up of industry?s other sources of finance. It has projected growth of adjusted non-food credit at 24% for this fiscal from the earlier 20%. Money supply measurements add the quantity of bank credit in their calculation of total money available in the economy. The RBI statement said the initial hope that the global crisis could be contained in the financial sector has been belied. India cannot be expected to remain immune to a global crisis of this nature. ?There is also considerable uncertainty about when we might see the bottom of the asset and business cycle. There is emerging consensus though that there may be no recovery until late 2009; indeed, some analysts believe that recovery may be delayed beyond 2009,? the governor cautioned.