India interest rate unchanged on inflation fears

Associated Press
Indians watch a screen on the facade of the the Bombay Stock Exchange (BSE) building in Mumbai, India, Monday, June 18, 2012. 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. (AP Photo/Rafiq Maqbool)
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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 kick-start 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 which 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 government's chief economic adviser, Kaushik Basu, said there had been some "back and forth" between the RBI and the government over changing interest rates.

He described the bank's decision as "within the realm of a difference of opinion."

In India "there is no hammer from the top that every agency of the government speaks in one voice," he said.

Basu said the economy was going through a "very difficult" phase, which he said was an opportunity for the government to implement crucial reforms and reduce the fiscal deficit.

"There is a groundswell of opinion that the economic reforms have to be pushed through to jump-start the economy. No political party will want to stand up and be counted as opposing reforms," Basu said.

Ratings agency Fitch threatened Monday to downgrade India's sovereign rating, echoing an earlier move by Standard & Poor's. Fitch said growth will deteriorate further unless India enacts structural reforms and improves the investment climate. India's limited progress on reducing its deficit is also weighing on its rating, Fitch said.

The benchmark Sensex index, which had risen on expectations of a rate cut in early trade, closed down 1.4 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.

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Associated Press writer Nirmala George in New Delhi contributed to this report.

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