India's central bank keeps interest rates unchanged

GMT 09:10 2015 Tuesday ,04 August

Arab Today, arab today India's central bank keeps interest rates unchanged

India's central bank
Mumbai - AFP

India's central bank kept interests rate on hold Tuesday, resisting government pressure for a fourth cut of the year and saying the country's economic recovery was "still work in progress".

The Reserve Bank of India (RBI) said the benchmark repo rate -- the level at which it lends to commercial banks -- would remain at 7.25 percent as analysts had expected.

"It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy," RBI governor Raghuram Rajan said in a statement following the bank's monetary policy review meeting in Mumbai.

Rajan had already snipped rates three times this year to aid India's economy, which at 7.5 percent growth outperformed China's for the first three months of 2015.

Prime Minister Narendra Modi's business-friendly government was keen for a further cut as it seeks to quicken the pace of growth in Asia's third-largest economy.

But Rajan insisted that any further reduction would have to wait until the inflationary effect of annual monsoon rains is known in a couple of months time.

Heavy monsoon rains are vital for crops and a dry season can reduce farm output, raising food prices which can be crippling for India's tens of millions of poor.

"Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible (US) Federal Reserve actions," Rajan said, leaving room for a cut at its next meeting on September 29.

Modi's government has made reviving India's economy a priority since coming to power last May, introducing reforms aimed at boosting demand and increasing investment.

- 'Work in progress' -

After cuts in January and March, the RBI kept rates unchanged in April, citing inflation concerns and a failure of most commercial banks to pass on lower loan rates to customers. In June it lopped off a further 25 basis points.

The governor told reporters it was the government's "right" to give the RBI its views on interest rates but that the bank was "de facto independent".

Pressure on Rajan to announce another cut was eased by data released Monday that showed factory output climbed to a six-month high in July on strong demand.

The governor noted that while "overall business confidence is positive" with consumer demand picking up, he stressed that India's "economic recovery is still work in progress". He put projected growth for 2015-16 at 7.6 per cent.

A survey of 42 economists by Bloomberg had overwhelmingly predicted Rajan would hold rates on inflationary concerns.

"No surprises in today's announcement," Ashutosh Datar, ‎an economist at IIFL Institutional Equities, told AFP.

"The bank has left the door open for another cut later in the year subject to benign inflation data," he added.

Rajan has made controlling inflation a priority, setting a target of bringing it consistently below six percent by next January and to four percent for the 2016/17 financial year.

Inflation increased 5.40 percent in June, faster than analysts' expectations, with food prices rising during the monsoon.

Mumbai's stock exchange appeared uninspired by the rate hold, with trading down 0.92 percent in the afternoon.

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