RBI set to hold interest rates steady

Economy marked slowest growth in 9 years during the first quarter of this year

India's central bank was widely expected to keep interest rates on hold Tuesday, a day after saying it was worried about still stubborn inflation despite a slowing economy.

The Reserve Bank of India (RBI) hinted in a report issued on the eve of its regular policy meeting in India's financial hub that it was unable to cut interest rates further at this point to spur the nation's flagging economy.

"Persistence of inflation, even as growth is slowing, has emerged as a major challenge for monetary policy," the bank said.

India's once-booming economy grew just 5.3 percent between January and March, its slowest annual quarterly expansion in nine years.

While other central banks around the globe have been easing interest rates in bids to revive their troubled economies, the RBI suggested that economic reforms to boost investment were the key to India's revival.

The RBI, which will announce its rates decision at 0530 GMT, rebuked the government, saying "lack of a quick policy response to address structural bottlenecks and encourage investment exacerbated the (economic) slowdown".

Prime Minister Manmohan Singh's Congress party-led government has failed to make significant strides towards scaling back hefty subsidies on food, fuel and fertilisers or cutting its sizeable fiscal deficit, analysts note.

The economy is now at a "critical juncture" and the RBI encouraged "policy actions to encourage investment", which would include removing constraints on foreign direct investment.

The bank lowered rates in April to kickstart growth -- its first such move in three years. But it has since kept monetary policy steady, citing inflationary pressures, despite calls from business leaders to stimulate the economy.

A weak monsoon, in which the rains have been more than 20 percent lower than normal so far, has stoked the bank's inflation worries because of the potential impact on food prices if crops fail.

Wholesale inflation already stands at 7.25 percent -- far above the bank's comfort level of five to six percent -- while the consumer price index, which covers a smaller band of goods, is at 10.02 percent.

"With upside risks to inflation, we believe that there is limited room for the RBI -- at this juncture -- to support growth through a cut in the repo rate," said Shubhada Rao, chief economist at private Yes Bank.

 

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