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Summary India's central bank left its key interest rate unchanged Monday due to inflation concerns.
The decision thwarted hopes of a rate cut to kickstart flagging growth in Asias third-largest economy.The Reserve Bank of India said the policy repo rate at which it makes short term loans to bankswould 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-point rate cut, given the recent rush of dismal economic data in India and heightened global uncertainty.Indias 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 slowdown.Slowing growth has not tamed inflation. Rising food prices drove Indias 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-percentage-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 1.2 percent on the news.The bank also took a step to improve credit flow 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.
