India keeps interest rates on hold

RBI governor says bank is awaiting further signs of slowing inflation along with "high-quality fiscal consolidation"

MUMBAI: India's central bank kept interest rates unchanged on Tuesday, three weeks after announcing an unscheduled cut, signalling that it wants to wait for the government's annual budget before any further easing.

After a meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would stay at 7.75 per cent.

RBI governor Raghuram Rajan said the bank was awaiting further signs of slowing inflation along with "high-quality fiscal consolidation", with the government's budget due to be delivered on February 28.

"We are looking for further cues on progress of disinflation. And on the fiscal front we have the budget coming up. So those are the important developments we would pay attention to," Rajan told reporters.

Most economists had predicted Tuesday's rate would remain on hold after the RBI surprised investors with a 25 basis points cut on January 15, citing in part cooling inflation from falling global oil prices. It was the first reduction in 20 months.

The RBI has been under pressure from government and business leaders to reduce rates to increase lending and help kickstart Asia's third-largest economy, but Rajan's priority has been to bring inflation under control.

Consumer prices rose five per cent year-on-year in December, well within the RBI's target of a maximum six per cent by next January.

The RBI, which on Tuesday also kept the cash reserve ratio unchanged at 4.0 per cent, said inflation was likely to remain on target by the start of 2016.

"It looks like growth will be assuming greater significance hereon for the RBI and inflation is unlikely to demand the single-minded focus it did earlier," said Shubhada Rao, chief economist with YES Bank.

The previous left-leaning government struggled in recent years to keep the fiscal deficit under control, partly because of India's massive subsidies bill and a sluggish economy.

Prime Minister Narendra Modi, who stormed to power in May last year, pledged to revive the flagging economy by attracting more foreign investors and bolstering manufacturing.

Finance Minister Arun Jaitley, however, has promised to keep the fiscal deficit at 4.1 per cent of GDP in the current financial year and push it even lower in coming years.

Modi's right-wing government has introduced a series of reforms and vowed last month to banish India's reputation as a tough place to do business.

He also told US President Barack Obama during a visit to New Delhi, along with American CEOs, that he would ease off on taxes and encourage innovation.

The government surprised analysts on Friday when it announced the economy had accelerated to 6.9 per cent in 2014, after revising GDP data using a new method that brought India closer to international standards.

India had been struggling through the worst slowdown in years, growing at 4.7 per cent in 2014, according to the previously reported figures.

Reaction to the rate decision was largely muted, with the Bombay Stock Exchange's benchmark Sensex index declining 0.22 per cent to 29,058.29 points.