India’s central bank keeps interest rates on hold

December 16, 2011
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India's central bank on Friday kept interest rates on hold as expected/AFP
MUMBAI, Dec 16 – India’s central bank on Friday kept interest rates on hold as expected, faced with an overall economic slowdown, a depreciating rupee and continued concerns over high inflation.

The Reserve Bank of India made no changes to its repo rate at which it lends to commercial banks or the reverse repo rate that it pays banks for deposits. They remained at 8.50 percent and 7.50 percent respectively.

The RBI has raised interest rates 13 times since March 2010, angering business leaders who say it has hit economic growth and investor confidence in the South Asian giant.

Governor Duvvuri Subbarao had indicated at the bank’s last mid-quarter monetary policy meeting in October that the likelihood of another rise was “relatively low.”

The bank said in a statement on its website on Friday that in view of a slight dip in inflation, “further rate hikes might not be warranted” in the months ahead.

“From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” it added.

But despite indications of a possible future cut, the RBI said inflationary pressures remained high, while the rupee was also under stress.

“The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead,” it added.

Subbarao has maintained the 13 rate hikes were necessary to combat high inflation, which has been running at near double figures for months, even if it means growth takes a short-term hit.

Friday’s softening in the bank’s hawkish stance comes amid growing concern from business leaders and India’s finance minister that growth and investment have taken too great a hit.

India’s government expects the economy to grow at a rate of 7.5 percent this financial year, down from its earlier estimate of 9.0 percent.

Private economists, though, believe gross domestic product growth will be nearer 7.0 percent or lower.

India’s Sensex index of 30 leading shares was encouraged by Friday’s decision, trading up 130.58 points or 0.82 percent at 15,967.05.

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