India's central bank keeps interest rates unchanged

Reserve Bank of India says benchmark repo rate would remain at 7.25 per cent

MUMBAI: India's central bank kept its key interest rate on hold on Tuesday as analysts had expected, resisting government pressure for a fourth cut of the year.

The Reserve Bank of India (RBI) said the benchmark repo rate — the level at which it lends to commercial banks — would remain at 7.25 per cent.

"It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy," RBI governor Raghuram Rajan said in a statement following the bank's monetary policy review meeting in Mumbai.

Rajan had already snipped rates three times this year to aid India's economy, which at 7.5 per cent growth outperformed China's for the first three months of 2015.

Prime Minister Narendra Modi's business-friendly government was keen for a further cut as it seeks to quicken the pace of growth in Asia's third-largest economy.

But Rajan has insisted that any further reduction would have to wait until the inflationary effect of annual monsoon rains is known in a couple of months’ time.

Heavy monsoon rains are vital for crops and a dry season can reduce farm output, raising food prices which can be crippling for India's tens of millions of poor.

"Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions," Rajan said.

The bank left room for a cut at its next meeting on September 29. A survey of 42 economists by Bloomberg had overwhelmingly predicted Rajan would hold rates on inflationary concerns.

The governor has made controlling inflation a priority, setting a target of bringing it consistently below six per cent by next January and to four per cent for the 2016/17 financial year.

Inflation increased 5.40 per cent in June, faster than analysts' expectations, with food prices rising during the monsoon.

Modi's government has made reviving India's economy a priority since coming to power last May, introducing reforms aimed at boosting demand and increasing investment.

After cuts in January and March, the RBI kept rates unchanged in April, citing inflation concerns and a failure of most commercial banks to on pass lower loan rates to customers. In June it lopped off a further 25 basis points.

Pressure on Rajan to announce another cut was eased by data released Monday that showed factory output climbed to a six-month high in July on strong demand.