India interest rate unchanged on inflation fears

[June 18, 2012]  MUMBAI, India (AP) -- India's central bank left its key interest rate unchanged Monday due to inflation concerns, thwarting hopes of a rate cut to kickstart flagging growth in Asia's third-largest economy.

The Reserve Bank of India said the policy repo rate -- at which it makes short term loans to banks -- would remain unchanged at 8.0 percent, and the cash reserve ratio -- the ratio of cash banks must keep on hand -- would stay at 4.75 percent.

"Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks," the bank said in its policy statement. It said headline inflation remains "above levels consistent with sustainable growth."

Most economists had expected a quarter percentage point rate cut, given the recent rush of dismal economic data in India and heightened global uncertainty.

India's growth slowed to a nine-year low of 5.3 percent in the quarter ended in March, with the bank blaming weak investment and decelerating industrial output for the slump.

Slowing growth has not tamed inflation. Rising food prices drove India's benchmark inflation rate to 7.6 percent in May from 7.2 percent in April. The steep depreciation of the rupee against the dollar has limited the relief India -- which imports three-quarters of its oil -- had hoped to gain from lower global crude prices.

In April, the Reserve Bank of India surprised markets with a half point rate cut, even as it urged New Delhi to tackle supply bottlenecks, reduce the fiscal deficit and improve the investment climate.

"Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small," the bank said in a statement.

"Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures."

The benchmark Sensex index, which had risen on expectations of a rate cut in early trade, slipped 1.5 percent.

"The Reserve Bank has clearly said that interest rates are not the solution for everything," said Karvy Stock Broking economist Madhavi Arora. New Delhi's surprise decision last week to raise minimum crop prices for Indian farmers will worsen food inflation, she said.

The narrow victory Sunday of a pro-bailout party in Greece reduces the chance of an imminent Greek exit from the euro and could stoke a rally in global commodity prices, which would also exacerbate inflation in India, she said.

The bank also took a step to free up credit to exporters by raising the cap on banks' export credit refinancing from 15 percent to 50 percent, effective June 30. The Reserve Bank said the move would provide banks in India with 300 billion rupees ($5.4 billion) of additional liquidity.

[Associated Press; By ERIKA KINETZ]

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