India's central bank holds interest rates

 07 Jun 2016 - 9:31

India's central bank holds interest rates
RBI Governor Raghuram Rajan attends a news conference after their bimonthly monetary policy review in Mumbai, India. REUTERS/Danish Siddiqui


Mumbai: India's central bank on Tuesday held its key interest rate at a five-year low, citing inflationary fears in the world's fastest-growing major economy ahead of the imminent monsoon rains. 

In a widely expected move, the Reserve Bank of India (RBI) said it would keep the benchmark repo rate, the level at which it lends to commercial banks, at 6.5 percent.

All 44 economists in a Bloomberg News survey predicted that the bank would hold rates after it cut them by 25 basis points in April to their lowest level since early 2011.

In the same month, inflation quickened more than expected as consumer prices rose 5.4 percent from a year earlier, driven up by higher food prices, catching many economists by surprise.

"The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain," RBI governor Raghuram Rajan said in a statement following the monetary policy review meeting in Mumbai.

Rajan, who has made taming India's once-runaway prices a priority of his tenure, has set a goal of limiting inflation to 5 percent by March 2017.

The monsoon, expected to hit later in June, is a key factor in food price inflation because of its huge impact on India's farmers, whose crops are highly dependent on the annual rains.

Rajan said the RBI would only act again on rates once the inflationary outcome of the monsoon was known.

"A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward (inflationary) pressures," Rajan said. 

"Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative," his statement added.

The RBI kept its gross domestic product (GDP) projection for 2017-17 at 7.6 percent.

Official figures last month showed India's economy grew 7.6 percent in 2015-16, retaining its place as the world's fastest-growing major economy.

India's media is abuzz with speculation about whether Rajan will be given a second three-year term as governor when his current contract expires in September.

All eyes were on a post-rate decision press conference on Tuesday to see if he would give any hint about continuing or not.

Rajan has widely been credited with bringing stability to India's economy but has clashed with Prime Minister Narendra Modi's Hindu nationalist government, which wanted him to cut rates further.

In 2015 the RBI lopped 125 basis points off borrowing rates in four separate cuts, before slashing again in April.

But the rate is still much higher than that of other major economies such as the United States or Japan, where benchmark rates are still hovering close to or below zero.