India Holds Interest Rate Steady Despite Pressure


India's central bank kept its benchmark interest rate on hold on Monday, preferring to wait to see the impact of a flurry of government reforms before reducing the cost of borrowing.

The Reserve Bank of India had been under pressure from business leaders and the government to cut interest rates to give a further boost to the ailing economy, which grew at just 5.5 percent on year in the quarter to June.

Bank governor Duvvuri Subbarao acknowledged that recent reforms "have started to reverse sentiments", but he said that inflation was still too high.

"For the moment, inflationary pressures, both at wholesale and retail levels, are still strong," he said in a statement.

In a measure designed to increase liquidity and lending in the banking sector, the bank cut its cash reserve ratio, the amount which banks have to keep aside as deposits, by 25 basis points to 4.50 percent.

The Mumbai-based central bank has not cut benchmark rates since April in a bid to keep a lid on inflation, which hit 7.55 percent in August -- far above the RBI's comfort level.

Subbarao has repeatedly called for policy action from the government to reduce subsidies and improve the investment climate before further cuts can be approved.

Prime Minister Manmohan Singh's cabinet approved a slew of measures late last week, hiking diesel prices, opening the doors to foreign investors in key new sectors and approving the part-privatisation of four state-run companies.

Business leaders have been clamouring for a rate cut to help revive Asia's third-largest economy, and economists were divided before the meeting on Monday about the likely outcome.

Shubhada Rao, chief economist with private Yes Bank, had said that a cut on Monday would be "awkward".

"Monday would be just too soon for the RBI to join the party," Rao said.

Singh faces serious opposition from trade unions, protests and his fiery coalition ally Mamata Banerjee, who runs the regional Trinamool Congress party and wants the reforms scrapped.

On numerous occasions in Singh's second term as premier, the government has reversed or watered down reform proposals once confronted with resistance.

Moody's ratings agency said on Monday that India's reform plans would bolster investor sentiment, but would not significantly improve the state of the government's strained finances.

Fellow ratings agency Standard & Poor's also highlighted the uncertainty over the implementation of the measures but said that they could have a "medium-to long-term positive impact on the macroeconomy of India".

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