India central bank holds interest rates, warns of inflation (Roundup)

Oct 27, 2009, 11:32 GMT

   New Delhi - India's central bank announced Tuesday that it would keep key short-term interest rates at their current record lows to support the economic recovery process while trying to ensure price stability.

   The Reserve Bank of India also retained its growth projection for the 2009-10 fiscal year at 6 per cent while raising the inflation forecast to 6.5 per cent from 5 per cent in its mid-yearly review of monetary policy.

   Economic recovery and a dip in farm productivity due to poor monsoons would lead to higher inflation than earlier expected, bank governor D Subbarao said.

   In an effort to bolster a slowing economy, the bank took several measures to support liquidity since October 2008, including cutting its short-term lending rate by 4.25 percentage points and the reverse repo rate by 2.75 percentage points.

   The federal bank announced Tuesday that it had raised the statutory liquidity ratio, the minimum deposits that commercial banks must invest in government securities, to 25 per cent from 24 per cent.

   The repo rate, however, remained unchanged at 4.75 per cent, the reverse repo rate at 3.25 per cent and the cash-reserve requirement at 5 per cent, the central bank said.

   'The precise challenge which the bank faces is to support the recovery process without compromising on price stability,' Subbarao said.

   After posting three years of over 9 per cent growth, the Indian economy slowed to about 6.7 per cent in the 2008-09 fiscal year.

   'The balance of judgement at the current juncture is that it may be appropriate to sequence the exit in a calibrated way so that while the recovery process is not hampered, inflation expectations remain anchored,' Subbarao said.

   The bank also said the huge budgetary deficit posed a danger and recommended the government rein in debt. Total borrowing in fiscal year 2009-10 is expected to be in the range of 115 billion dollars.

   Federal Finance Minister Pranab Mukherjee said he agreed with the Reserve Bank's assessment. 'Until the economy is on a firm recovery path, the stimulus will continue,' Mukherjee added.

   Markets reacted negatively, with the benchmark 30-share Sensex of the Bombay Stock Exchange dropping by 2.31 per cent to close at 16,353.40.

   The broader 50-share Nifty of the National Stock Exchange ended at 4846.70, 2.50 per cent below its previous close. Realty, metals and banking were among the big losers.