MUMBAI (AFP) – India’s central bank kept interest rates on hold on Tuesday as expected as it awaits more proof that stubbornly high inflation is headed downward in Asia’s third-largest economy.
After a meeting in financial hub Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would remain at a steep 8.0 per cent.
Reserve Bank of India (RBI) governor Raghuram Rajan said that although headline inflation had slowed, the full impact of just-ended annual rains that are crucial for crop production is yet to be seen.
“There are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly,” Rajan said.
The rates hold was widely expected by economists, but business leaders have been clamouring for the bank to cut rates and bring down steep borrowing costs to spur sluggish economic growth.
Wholesale price inflation fell to a near five-year low in August, but retail inflation, closely followed by the RBI, is hovering at close to eight per cent.
The RBI is aiming to bring retail inflation down to eight per cent by January 2015 and six per cent a year later.
“Inflation pressures seem to be easing and fears of the impact of a deficient monsoon too are abating,” said Rajiv Biswas, chief Asia economist at global consultancy IHS.
“But the RBI will look for signs that show the slowdown in price rises is sustainable” before reducing rates, Biswas said before Tuesday’s announcement.
Rajan has promised not to keep India’s benchmark lending rate at its current level of eight per cent for a “second” longer than necessary.
But Rajan, nicknamed “The Guv”, insists “the back of inflation” must be broken before the central bank starts cutting rates.
The bank has raised the repo rate three times since he was installed as governor a year ago.
Rajan has been praised for tackling inflation, which hits tens of millions of India’s poor the hardest. He has stabilised the rupee and boosted investor confidence since taking over.
India’s right-wing government, which took office in May, is keen to see interest rates fall to help it fulfil its election promise to accelerate sluggish economic growth.
The economy expanded by 5.7 per cent in the first quarter of the financial year from the same period a year earlier – the best quarterly performance in over two years.
But economists say India needs to return to at least eight-to-nine per cent growth to create jobs for its tens of millions of young people.
Prime Minister Narendra Modi has been promising to roll out the red carpet for foreign investors during his current US visit as he seeks money for projects including those to overhaul India’s dilapidated infrastructure.