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Keeping eye on inflation, India holds rates steady

August 5, 2014

AFP



New Delhi:India's central bank left interest rates unchanged on Tuesday, keeping a watchful eye on inflation as it waits to assess the impact of weak annual rains on food prices.



After meeting in financial capital Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would remain steady at a steep 8 per cent.



The move was widely expected by economists, who said the RBI needed time to assess whether a drought situation could emerge and send food prices soaring despite a recent easing in the consumer price index.



"With some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted," said RBI chief Raghuram Rajan.

Rajan has raised the key repo rate three times to clamp down on rising prices since he came to the helm in September, gaining a reputation for hawkishness on inflation, even with the economy growing at sub-five per cent for a second straight year.



Businesses have been clamouring for monetary easing, saying the current high repo rate discourages investment needed to help India's economy get back on its feet.



Although June's consumer price index, closely watched by the central bank, rose by its slowest pace since January 2012, climbing 7.31 per cent from a year earlier, Rajan wants further evidence inflation is slowing before cutting rates.



Indian farmers rely for irrigation largely on the annual rains, which are more than 20 per cent below average so far this year meaning the CPI is likely to rise again later in the year.



"The Reserve Bank will continue to monitor inflation developments closely, and remains committed to the disinflationary path of taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016," Rajan said.



The central bank on Tuesday cut the statutory liquidity ratio, the amount banks must keep in government securities, by 50 basis points to 22 per cent, to free up funds for the banking system and spur economic activity.



But the cash reserve ratio -- the amount of cash deposits that banks must keep with the RBI -- was held steady at 4.0 per cent.



India's economy and inflation levels remain highly vulnerable to any sharp rise in global crude oil prices as New Delhi imports more than 80 per cent of its oil needs.



Rajan said upside risks to inflation included "possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints".



Liquidity boost

To boost liquidity in the money and debt markets, the RBI also lowered the cap on the amount of debt banks can hold without marking to market to 24 perc ent from 24.5 per cent, with effect from the fortnight beginning August 9, says a Bloomberg report.




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Source: Times of Oman


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