India’s central bank keeps rates on hold

March 15, 2012
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The Bank of India/AFP
MUMBAI, Mar 15 – India’s central bank kept interest rates on hold Thursday, disappointing business leaders who had pressed for a cut they says is essential to spur the country’s slowing economy.

The Reserve Bank of India (RBI) left its benchmark repo rate at which it lends to commercial banks at 8.50 percent and the reverse repo rate, which it pays banks for deposits, at 7.50 percent.

The bank said its move was based on fears that a rise in global oil prices could again stoke inflation in Asia’s third-largest economy, but corporate leaders said leaving rates at elevated levels was hitting growth and investment.

“Industry needs strong easing signals from the central bank in order to ensure investments pick-up,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

The bank has kept rates on hold since late last year after hiking them 13 times since March 2010, which has contributed to a severe growth slowdown.

The economy is expected to expand 6.9 percent in the current financial year to March 31 — its slowest pace since the 2008 global financial crisis.

Global crude prices “have spiked suddenly, reflecting both geo-political concerns and abundant global liquidity, accentuating the risks to growth and inflation,” bank governor Duvvuri Subbarao said, announcing the rate decision.

A widening fiscal deficit and the rupee’s depreciation against major currencies had also exacerbated inflationary risks, he said.

While he said “no further (monetary) tightening is required and future actions will be towards lowering the rates”, he added that inflationary dangers “will influence both the timing and magnitude of future rate actions”.

Indian shares extended their losses after the bank’s announcement, with the blue-chip Sensex index down 171.63 points, or nearly one percent, at 17,739.9 points in afternoon trade.

Economists had expected rates to be put on hold and said they believed the bank would wait until at least April before cutting them as it waits to see that inflation was under control.

They also said the bank wanted to assess steps to narrow the fiscal gap to be announced Friday in the national budget.

But Siddhartha Sanyal, chief India economist at Barclays Capital, said the latest statement was “a concern as the bank is non-committal about a rate cut in April.” The bank’s next policy-setting meeting is set for April 17.

India’s headline inflation accelerated unexpectedly to nearly seven percent last month, data showed Wednesday, well above the bank’s comfort level of around five percent.

The rate hit a 26-month-low of 6.55 percent in January before creeping back up in February to 6.95 percent.

The bank last week unexpectedly cut the amount of cash commercial banks must keep in reserve — to spur slackening growth and crank up lending — which analysts said had reduced chances for further immediate monetary loosening.

It was the second time since the start of the year that the bank had reduced the cash reserve ratio.

“The central bank is walking a tricky path, still trying to balance growth with inflation,” said Deepali Bhargava, chief India economist at Espirito Santo Securities.

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