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India's central bank holds interest rates

The short-term rate at which the central bank lends to commercial banks, is kept at 4.75 percent

India's central bank holds interest rates

India's central bank held key interest rates steady at record lows yesterday, but said it was time to roll back some of the "unconventional" measures taken to counter the global financial crisis.
Reserve Bank of India (RBI) governor Duvvuri Subbarao said in a statement that the economy was not ready for a hike in "conventional" short-term lending rates, the main policy tool at the bank's disposal to influence lending.
But the bank did reverse some of the monetary policy measures taken during the global financial crisis that had served to increase liquidity in the banking system when there were fears about a lending shortage.
Economists had anticipated the decision to hold short-term interest rates, saying any hike would likely come later this year or in early 2010 once a recently observed economic uptick had become entrenched.
"The precise challenge which the bank faces is to support the recovery process without compromising on price stability," Subbarao said in the statement. He was expected to make a statement later yesterday,
The repo, the short-term rate at which the central bank lends to commercial banks, was kept at 4.75 percent, while the reverse repo, the rate at which it borrows from banks, was held at 3.25 percent.
"The policy was on expected lines. The RBI is sending signals and preparing the system for a tightening of rates in the near future, led by inflationary concerns," said Rupa Rege Nitsure, economist with state-run Bank of Baroda.
The RBI did increase the statutory liquidity ratio (SLR) - the minimum share of bank deposits to be held in government bonds, cash and gold - for commercial banks to 25 percent, from 24 percent.
"Reversing conventional measures is not appropriate for now, but the unconventional measures can be reversed immediately," said Subbarao after the half-yearly review of monetary policy.
The central bank said there were definite signs of recovery and kept its earlier growth forecast at 6.0 percent "with an upside bias" for the year to March.
Inflation has mirrored the growth in output, rising to 1.0 percent over 12 months for the week ended October 10 after a poor monsoon sent food prices spiralling across the country.
The central bank has said inflation could rise further in coming months, forecasting it at 6.5 percent by March next year.
Siddhartha Sanyal, an economist with Edelweiss Securities, said he thought the bank would have sounded more concerned by rising inflation.
"We expected the central bank to be more hawkish, looking at rising inflation," he said.
Indian share prices - which had been taking their cue from a Wall Street plunge - recovered briefly in reaction to the announcement, but were still down 1.43 percent in afternoon trade.
The RBI has cut the "repo" interest rate six times since October 2008, as well as introducing unconventional measures to mitigate the impact of the global financial crisis.
Between November 2008 and March this year, the government introduced three stimulus packages to help revive the economy as demand for goods and services was hit by the global slowdown.
Some analysts had suggested the central bank might increase the cash reserve ratio, the amount banks have to keep aside as deposit, as another way to soak up excess liquidity.
The rate was left unchanged at 5.0 percent yesterday.


Updated : 2021-05-16 13:58 GMT+08:00