MUMBAI (Reuters) - The Reserve Bank of India (RBI) unexpectedly kept the country's policy interest rate on hold on Wednesday, despite calling current inflation too high, citing the prospect of easing retail prices and its concerns about the weak domestic economy.
The RBI had been widely expected to raise the repo rate on Wednesday, after lifting the country's main lending rate by 25 basis points each at its previous reviews in September and October. It instead opted to keep the country's main lending rate at 7.75 percent.
Benchmark 10-year bond yield dropped 12 basis points to 8.78 percent from levels before the decision, while the Nifty gained more than 1 percent. The rupee strengthened.
Also read experts' views on the RBI's rate decision, click http://in.reuters.com/article/2013/12/18/india-economy-rbi-rates-experts-idINDEE9BH04H20131218
However, the central bank warned it would remain vigilant on inflation and that it would be ready to act even in between policy reviews should headline or core inflation not ease as expected, albeit noting it would do so in a "calibrated" manner.
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The RBI added it would also gauge the impact from any decision by the U.S. Federal Reserve to start withdrawing its monetary stimulus. The U.S. central bank concludes its policy meeting later in the day.
"The policy decision is a close one. Current inflation is too high," said the RBI in its policy statement.
"However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."
The most recent data showed consumer prices posted their biggest annual rise on record in November - 11.24 percent - while wholesale inflation hit a 14-month high last month.
Surging inflation are being driven by higher vegetable prices that hurt the country's poor the most, and are thus posing another headache to the embattled Congress party, which is facing general elections due by May, and was drubbed in recent state polls.
Still, analysts have said the surge in prices of vegetables such as onions are largely impacted by India's lack of reliable ways to transport the produce and by traders suspected of hoarding supplies to raise prices, limiting the impact of monetary policy.
For businesses and investors in Asia's third-largest economy, the priority had been a recovery in growth, which would help India again attract investment and inflows that would help contain a current-account deficit that surged to a record high in the last fiscal year.
Wholesalers have also been saying vegetable prices have eased this month, providing some potential relief on inflation, though analysts warned prices could again spike.
"I think it is just postponement of action, because the policy clearly says they (the RBI) may take action any time, even in the interim between two policies, if the situation warrants," said Rupa Rege Nitsure, chief economist of Bank of Baroda in Mumbai.
The RBI said on Wednesday it would retain its vigilance on inflation.
"There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the U.S. Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation. The Reserve Bank will be vigilant," it said.
(Reporting by Suvashree Dey Choudhury; Editing by Rafael Nam)
