RBI holds interest rates

RBI holds interest rates

The Reserve Bank of India (RBI) left its benchmark short-term interest rate unchanged at 5.0 percent on Tuesday, saying it wanted to keep fast growth on track at a time when global uncertainties were on the rise.

The decision surprised some in the market who had expected the central bank to raise the short-term rate by a quarter percentage point for the third time in a row, to temper inflation expectations amid signs of robust domestic demand.

But others said the RBI wanted to maintain momentum in Asia's third-largest economy, which it projects will expand by about 7 percent in the financial year ending March 2006, and had left room for a rise in October.

RBI Governor Yaga Venugopal Reddy told a news conference that domestic demand pressures were not as severe as the RBI had thought in April, when it last raised rates, but he was watching developments and reaction would be "prompt and effective".

"Domestic factors are by and large more positive but if we look at global factors, the uncertainties are more than what they were," he said, adding that these include high oil prices, global imbalances in the financial markets and China's yuan revaluation.

"There is an impression of stability but there is a lurking fear of disequilibrium and unless one gets an idea as to how they unfold themselves, taking the pre-emptive action could have had unintended consequences," he said.

Government bonds rallied on the rate announcement, with the yield on the popular eight-year 7.27 percent bond sliding 20 basis points to a one-month low of 6.87 percent.

The rupee rose more than 0.1 percent to 43.50/51 per dollar from 43.55/56 earlier in the day.

"There is a slight slowdown in (the) global economy, so our central bank would like to wait and watch," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Bombay.

"As we are seeing a strong industrial recovery supported by investment demand, the RBI does not want to hinder that."


Finance Minister Palaniappan Chidambaram told reporters in New Delhi that there was no case for a sharp adjustment in rates now and the RBI's policy was in line with government thinking.

The central bank stuck with its earlier forecast that inflation at the end of this fiscal year will be 5.0-5.5 percent.

It said a liquidity overhang had been reduced, there was increased loan demand, industrial growth had revived and the current level of inflation remained moderate, while global monetary policy was still "somewhat accommodative".

The central bank began raising rates in October after wholesale price inflation hit an oil-driven 3-1/2-year high of 8.74 percent last August. This measure of inflation, which is the most widely watched, had declined to 4.1 percent by early July.

The reverse repo, the overnight rate at which the central bank drains liquidity from the market, was last raised unexpectedly in late April by a quarter percentage point to contain inflation.

The central bank left its bank rate, used to price long-term loans, unchanged on Tuesday at a 34-year low of 6.0 percent, as expected. The rate has been steady for two years.

India raised state-controlled fuel prices by about 7 percent in June, after a seven-month freeze, but the central bank said the inflationary impact of higher global oil prices may not have been fully felt.

Other risks included rising U.S. interest rates and delayed monsoon rains, which could impact farm growth.

Siddharth Mathur, strategist at JPMorgan Chase in Bombay, said risks remained biased to higher rates.

"Based on the central bank's statement today and our assessment of the economic environment, we expect the Reserve Bank of India will raise rates at its October review."

A Reuters poll of 15 analysts last week showed 8 had expected a rate rise this time around.

Source: http://in.news.yahoo.com/050726/137/5zhpx.html

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