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India holds interest rates, despite slowing growth

India’s central bank unexpectedly kept interest rates unchanged on Monday in a bid to curb inflation, despite facing pressure to cut the cost of borrowing and boost stuttering economic growth.

The Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would remain at 8.0 percent, while the cash reserve ratio for banks was also unchanged at 4.75 percent.

The move went against most economists’ expectations of a further easing in rates by the RBI following its first reduction in three years in April, amid a host of economic problems for the once-booming Asian giant.

“There are several factors responsible for the slowdown in activity... with the role of interest rates being relatively small,” said the RBI in its mid-quarter monetary policy review.

“Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures,” it said, placing responsibility on the government to revive growth.

The bank had been under pressure to cut rates after the economy grew just 5.3 percent in January to March, its slowest quarterly expansion in nine years.

But hopes of an aggressive cut by the policy-makers in Mumbai had been tempered by data last week showing a marginal rise in wholesale price inflation in May to 7.55 percent on an annual basis.

India is also grappling with a gaping fiscal deficit, a weak rupee and the impact of the eurozone debt crisis.

The euro and most Asian stock markets rose early Monday as trading floors welcomed Greek election results that saw defeat for a hard-left party that threatened to reject cuts enshrined in the country’s bailout deal.

But India’s benchmark share index was trading down 1.70 percent at 02:30 pm (0900 GMT) on the RBI decision, which was met with disappointment by industry bodies.

Chandrajit Banerjee, chairman of the Confederation of Indian Industry, accused the inflation-centric policy of “missing the bigger picture”, at a time when declining gross domestic product growth means “millions of livelihoods are under threat”.

But Shubhada Rao, chief economist at Yes Bank, said the measure was a “good call” and would pressure the government to take action.

“There are not as yet any concrete steps by the government either towards fiscal adjustment or even small reforms to survive the investment climate,” she told AFP.

Coalition bickering has brought Prime Minister Manmohan Singh’s once ambitious reform agenda to a near standstill, while new tax policies seen as hostile to foreign investment have added to the gloomy economic outlook.

Following the latest shock GDP figures for January to March, industrial output stalled in April with growth of just 0.1 percent year-on-year, suggesting continued weakness in the current financial quarter.

Ratings agency Standard & Poor’s warned this month that India could be the first of the BRIC major emerging economies to lose its investment-grade debt classification unless it revived growth and rekindled its reform agenda.

The RBI cut interest rates by a higher-than-expected 50 basis points in April in a bid to spur faltering growth, after keeping them on hold since late last year.

Rates were previously hiked 13 times from March 2010 to tame soaring inflation, in one of the most aggressive monetary policy tightening drives of any major economy.