Mumbai, Apr 29: Lehman Brothers believes the Reserve Bank of India's decision to hold repo rates steady is positive, as it should not slow the flagging growth momentum further.

However, the global investment bank is more bearish on growth than the RBI, expecting GDP growth to moderate to 7.6 per cent in the fiscal 2008-09 because of the past interest rate hikes, financial market turbulence, slackening foreign demand and high inflation.

Lehman expects WPI inflation to average 6.9 per cent year-on-year in FY09, remaining above the RBI's target in 2008 but falling towards its target by Q1 2009.

It does not expect large second-round effects on inflation and therefore expects the RBI to keep repo and reverse repo rates unchanged in 2008.

In addition, based on its view that the US Fed will cut rates to 1.25 per cent by early 2009, Lehman expects India to attract massive capital inflows, adding to liquidity and requiring at least one more 50 bps hike in the CRR during the course of year.

In its annual policy statement for 2008-09, the RBI on Tuesday left the repo and reverse repo rates unchanged at 7.75 per cent and 6.0 per cent respectively but hiked the cash reserve ratio by 25 basis points to 8.25 per cent effective from May 24. This was a surprise to the market, which was expecting a repo rate hike but an unchanged CRR.

The timing of CRR hike is surprising as it comes soon after the 50 bps hike announced on April 17, to be implemented in two 25bp installments, on April 26 and 10 May.

This suggests that the RBI was contemplating a larger CRR hike earlier and decided to spread out the impact on banks. This was a prudent policy response to the difficult challenge of slowing growth yet rising inflation.

Lehman believes that a repo hike would have been too damaging for an economy already weakening, especially considering the lagged effects of monetary policy, whereas three phased 25 bps CRR hikes demonstrate that the RBI is serious about checking inflation, and should help contain inflationary expectations, with little impact on growth.

RBI expects some slowdown in growth momentum, setting a GDP growth target of 8.0-8.5 per cent for FY09 versus 8.5 per cent in FY08, while at the same time targeting wholesale price index inflation at a slightly higher 5.5 per cent versus 5.0 per cent.

The RBI's forecasts of monetary indicators such as non-food credit and money supply growth were also revised lower, in line with its lower GDP growth forecast.