The RBI left interest rates and the cash reserve ratio for banks unchanged on Monday, defying widespread expectations for a rate cut as it warned that doing so could worsen inflation.
The Reserve Bank of India kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent.
Economists polled by Reuters had forecast a rate cut, most likely of 25 basis points, while some government officials had also been calling for a rate cut.
Commentary
Sujan Hajra, Chief economist, Anand Rathi Securities, Mumbai
"The Reserve Bank of India's action is clearly disappointing. Inflation remains a concern, but the slowing growth needed at least a 50-basis-point rate cut. The RBI will have to ease sooner or later, otherwise there will be further challenges to growth.
"It can cut the cash reserve ratio even before the next policy. The decision will depend on the liquidity tightness."
LINKS
Live coverage: http://r.reuters.com/bat58r
BACKGROUND
- India's economy has been slowing sharply due to a combination of factors such as high borrowing costs, government inaction on key policies and sluggish global environment.
- Standard & Poor's said last week that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
- Industrial output rose just 0.1 percent in April, lower than expectations in a Reuters poll for a 1.7 percent increase. Output fell in March from a year earlier by 3.5 percent.
- Economic growth slowed to 5.3 percent in the March quarter, its weakest pace in nine years and sharply off 9.2 percent rise in the year-earlier period.
- Price pressures remain high with the wholesale price inflation accelerating to 7.55 percent in May from a year earlier, driven by double-digit rises in food and fuel prices.
- The Reserve Bank of India cut policy rates in April for the first time in three years, by 50 basis points, after raising them 13 times from March 2010 to last October.
(Reporting by Mumbai treasury team; Editing by Ranjit Gangadharan)
