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India keeps rates unchanged, warns of inflation

India keeps rates unchanged, warns of inflation

India's central bank kept key interest rates unchanged Tuesday, but warned that inflation will rise faster than previously expected as the economy recovers and drought pushes up food prices.
The Reserve Bank of India said in its quarterly policy review that headline inflation will likely hit 6.5 percent by March. That's higher than its July prediction of 5 percent, and higher than its medium-term inflation target of 3 percent.
It left its prediction of 6 percent economic growth, with an upward bias, for the fiscal year ending March unchanged.
"The global economy has begun to recover from the deep recession set off by the financial crisis," RBI governor D. Subbarao said in a statement. "The pace and shape of recovery, however, remain uncertain."
The bank's decision to leave interest rates unchanged is in line with expectations, but leaves unanswered the questions of when and how fast India will begin to unwind the huge monetary stimulus it pumped into India's economy after the collapse of Lehman Brothers late last year.
"Attention around the world, as also in India, has shifted from managing the crisis to managing the recovery," the bank said. "We need to reverse the expansionary stance."
Most economists believe the central bank will start to hike rates in the first half of 2010, given recent promising signs of industrial revival.
Since September 2008, the bank has infused India's trillion dollar economy with more than 5.85 trillion rupees ($125.5 billion) in actual or potential liquidity. It cut the benchmark repo rate _ at which the central bank makes short-term loans to commercial banks _ from 9 percent to 4.75 percent, and slashed the reverse repurchase rate _ the rate at which it borrows from commercial banks _ from 6 percent to 3.25 percent. It also reduced the cash reserve ratio, or the percentage of cash commercial banks must keep on hand, from 9 percent to 5 percent.
It left all those rates unchanged Tuesday.
The bank said a deficient monsoon _ India's summer rains were at their weakest since 1972 _ has exacerbated food price inflation. The bank also said global commodity prices, which bottomed in early 2009, have rebounded ahead of the global economic recovery.
Moreover, the base effect, which artificially pushed India's headline inflation into negative territory from June to August because of extremely high commodities prices last year, is now working in the opposite direction.
That threat of rising inflation distinguishes India from many other emerging and developed-world economies, some of which are concerned about deflation, the bank said.
The bank also warned of the danger of India's twin fiscal and current account deficits and said the government must stop borrowing so much money. Total government borrowing from the market for this fiscal year is expected to be 5.4 trillion rupees ($115.4 billion).
"This is crucial for investment demand to pick up on which hinge our long-term economic prospects," the bank said.
Goldman Sachs economist Tushar Poddar said in a report Monday that he expects RBI to start hiking rates in January and increase policy rates by 3 percentage points in 2010.


Updated : 2020-12-01 08:19 GMT+08:00