India s central bank keeps rates on hold

December 16, 2010 12:00 am

, MUMBAI, Dec 16 – India’s central bank on Thursday kept its key short-term interest rates unchanged, in line with forecasts, but still warned of the need for "continued vigilance" to curb inflation.

After six increases since March, the Reserve Bank of India (RBI) opted against a further hike, keeping the repo rate on loans to banks at 6.25 percent and the reverse repo it pays to banks for deposits at 5.25 percent.

The decision was in line with market expectations after the central bank signalled a pause in rate hikes last month but economists expect the bank to start raising rates early next year.

India has been the most aggressive Asian nation in raising rates to check the rising cost of living, as the country’s economy booms after the global financial crisis.

Finance Minister Pranab Mukherjee told reporters in New Delhi that the RBI’s policy decisions "will not adversely impact inflation trends" and would help boost liquidity.

The RBI governor Duvvuri Subbarao, however, expressed concern over inflation, saying there was a need for "continued vigilance".

The annual inflation rate cooled to 7.48 percent in November, its lowest level in 2010, but is still above the bank’s comfort zone of around 5.5 percent for the current financial year.

"Even as inflation has moderated, it remains significantly above the comfort level of the Reserve Bank," Subbarao said in the statement.

The bank wants inflation to eventually fall to four to 4.5 percent.

Analysts said the RBI would resume hiking rates early next year to battle inflationary pressures, which are rising due to fuel price hikes.

State-run oil marketing firms have started to raise prices this week, as global crude costs climb.

Analysts say the RBI could raise rates again if crude prices firm further and there are more fuel price hikes.

"The pause will compel the RBI to come out with more aggressive tightening next time, with inflation risks and expectations rising," said Rupa Rege Nitsure, chief economist with state-run Bank of Baroda.

Siddhartha Sanyal, chief India economist at Barclays Capital, said the RBI will "maintain a hawkish stance", while welcoming the decision to boost liquidity.

With economic growth buoyant, economists say inflation could start moving upward in the next financial year starting in March, and some predict it could hit 8.5 percent by December 2011 as global commodity prices rise.

"The central bank is not done with tightening," said Rajeev Malik, economist at CLSA, in a note to clients earlier in the week, forecasting further rate rises in 2011.

India — where the government is under pressure to curb rising living costs that have badly hit the country’s impoverished millions — and neighbouring emerging market giant China are battling to tame prices.

Figures released last week showed that industrial output in India expanded 10.8 percent in October from a year earlier, indicating consumer demand is still strong despite six rate hikes since March.

The data buttressed official government projections that economic growth for the fiscal year to March 31 could cross nine percent.

"It is just a matter of time before it (the RBI) returns from its brief hiatus to finish the job" of raising rates, HSBC chief India economist Leif Lybecker Eskesen said this week.


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