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Indian cenbank leaves key rates unchanged

Mumbai, September 18, 2012

India's central bank has left interest rates unchanged but cut the cash reserve ratio for banks, disappointing market hopes that it would follow up the government's unexpected bold reform measures by reducing borrowing costs.

The Reserve Bank of India (RBI) cut the ratio, the share of deposits banks must keep with it, by 25 basis points to 4.5 per cent to inject about Rs170 billion ($3.12 billion) into the banking system ahead of expected liquidity tightness due to advance tax payments and festive season demand.

While it praised the government's long-stalled policy initiatives to bolster growth and its fiscal position, it said the primary focus of monetary policy remained fighting high inflation.

The government made clear it wants a rate cut at the bank's next review in six weeks and said it was not yet finished with reforms.

"I am confident that between now and October 30, since the government is expected to take additional policy measures and lay out the path of fiscal correction, the RBI's response on October 30 will be more supportive of growth," Finance Minister P Chidambaram said.

The RBI held its policy repo rate at eight per cent, hours before the government said it would allow foreign direct investment in industries, including supermarkets and airlines.

Earlier, it announced a sharp increase in the price of heavily subsidised diesel.

Economists said their expectations for when the RBI, which has two more reviews this year, might cut rates remained unchanged. A recent Reuters poll forecast a median 25 basis point rate cut by 2012-end.

"A rate cut today would have made the RBI a laughing stock given that inflation is high, rising and will rise more, and it is above the RBI's forecast," said Rajeev Malik, senior economist at CLSA in Singapore.

Ratings agency Standard & Poor's, which earlier threatened to cut India's rating to junk, offered a cautious response to the reform efforts, saying the moves on foreign investment were encouraging but that it remained to be seen whether they could be implemented.

Since individual states will be allowed to opt in or out of allowing in foreign supermarkets, "the impact might be less than expected," said Takahira Ogawa, S&P's director of sovereign ratings.-Reuters




Tags: FDI | Reserve Bank of India | Interest rates |

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