* Benchmark interest rate held "for now" at 6.75 pct
* Cbank says to adjust rate in stages
* Cbank says room for rupiah to rise
* Forex reserves rise to $101.8 bln as of March 3
By Aditya Suharmoko and Rieka Rahadiana
JAKARTA, March 4 (Reuters) - Indonesia's central bank kept its benchmark interest rate steady on Friday, but vowed to tackle stubbornly high inflation in an effort to placate those market players worried it is falling behind the curve.
Bank Indonesia assured financial markets it would steadily but gradually lift interest rates and also encourage a stronger currency to control persistently high core inflation, which is at a 13-month high.
While a slender majority of economists polled by Reuters had forecast the overnight policy rate would be held steady at 6.75 percent, several believed a 25 basis point rise would have been more prudent.
The bank, however, said it was closely monitoring core inflation, saw room for further appreciation in the rupiah to temper imported inflation, and in a somewhat hawkish statement said it would adjust rates in stages whenever necessary.
"This decision does not change the direction of Bank Indonesia's monetary policy that is tending to be tight to manage high inflationary pressures," Bank Indonesia said, a month after it raised rates for the first time in two years.
The central bank said it was confident headline inflation could be kept on target at 4-6 percent for this year and at 3.5-5.5 percent in 2012, through a mixture of monetary and macro prudential policies and strong government commitment to control high food prices.
Economists weren't so sure.
"I can't say whether BI's decision is right or wrong but I think it would have been more prudent for them to hike the rate," said Wellian Wiranto, an economist with HSBC in Singapore. "I think they are missing a very good chance to strengthen their credibility."
The rate decision comes on the back of a 25 basis point rise last month that somewhat assuaged sceptical investors, and follows data on Tuesday showing monthly food prices declining for the first time in four years and inflation slowing.
Inflation triggered by food and fuel prices poses a dilemma for developing economies of whether to tighten policy to rein in inflation at a time when pricier oil will eat into national income, both by hurting domestic consumers and impacting final demand from the developed world.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on the interest rate, see:
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The overall stock market scarcely reacted after the announcement -- although bank stocks rallied -- while the currency and bond yields <0#IDBMK=> eased a touch. The markets have recovered some ground after investors sold off in January over concerns the central bank was behind the curve.
A sharp narrowing of the yield spread between 10- and 2-year bonds to 108 bps suggested investors were gearing up for more tightening in coming months, albeit slowly.
REACTIVE RATHER THAN PROACTIVE
"Stepping aside from the need for hikes, today's inaction shows that BI will be more reactive rather than proactive, and they are likely to only hike as and when there is an upside surprise to inflation print," Wiranto said in a note.
Analysts at Standard Chartered Bank said they now expected the policy rate to end 2011 at 7.25 percent, not 7.5 as they previously had forecast.
While the bank said on Friday it is was holding the rate steady "for now", it made clear it would continue to use both the benchmark rate and the rupiah's strength as tools to attract foreign funds and fight inflation.
"Bank Indonesia will keep pursuing steps on monetary and macroprudential policies, including managing imported inflation by rupiah strengthening," the bank said.
The central bank has been intervening in the foreign exchange market to keep the currency at below 9,000 to the dollar to meet an inflation target of between 4-6 percent for 2011.
On Friday the currency was trading at around 8,790.
Annual inflation in February slowed to 6.84 percent and monthly food prices dipped. February's annual core inflation, however, remained stubbornly up at 4.36 percent.
Analysts polled by Reuters before this week's data expected Bank Indonesia to raise rates to 7.5 percent by the end of the second quarter and leave it there until the year-end.
The central bank has normalised stimulus measures taken during the 2008 financial crisis to absorb excess liquidity in the financial system that can build up core inflation.
It has also raised dollar reserve requirements for commercial banks and limited their short-term foreign borrowings. .
Some of the new reserve requirements, which link the amount a bank has to set aside to its loans-to-deposits ratio, kicked in this month, which analysts said could be a reason Bank Indonesia held off on raising rates.
The bank said on Friday it would keep strengthening liquidity management.
The central bank adjusts its benchmark rate, used by banks as reference to set lending rates, to support an economy that is seen growing by 6.4 percent this year.
Bank Indonesia cut its policy rate by a total of 3 percentage points between December 2008 and August 2009 to shield the economy from the financial crisis. They kept the policy rate steady at 6.5 percent through 2010. (Additional reporting by Adriana Nina Kusuma in Jakarta, Saikat Chatterjee in Hong Kong; Writing by David Fox; Editing by Neil Chatterjee and Vidya Ranganathan)