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India holds rates steady on monsoon worries

India's central bank left interest rates unchanged on Tuesday (Aug 5), keeping a watchful eye on inflation as it waits to assess the impact of weak annual rains on food prices.

MUMBAI: India's central bank left interest rates unchanged on Tuesday (Aug 5), keeping a watchful eye on inflation as it waits to assess the impact of weak annual rains on food prices. After 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 remain steady at a steep 8.0 per cent.

The move was widely expected by economists, who said the RBI needed time to assess whether a drought situation could emerge and send food prices soaring -- despite a recent easing in the consumer price index. "With some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spillover to broader inflation, can be discounted," said RBI chief Raghuram Rajan.

Since he came to the helm in September, Rajan has raised the key repo rate three times to clamp down on rising prices, gaining a reputation for hawkishness on inflation, even with the economy growing at sub-five percent for a second straight year. Businesses have been clamouring for monetary easing, saying the current high repo rate discourages investment needed to help India's economy get back on its feet.

"The RBI could have taken this opportunity to effect a cut in interest rates," said Chandrajit Banerjee, director general at the Confederation of Indian Industry, pointing to the consumer price index that rose by its slowest pace in 30 months in June. But Rajan wants further evidence inflation is slowing before cutting rates, with consumer prices expected to rise again later this year because the annual rains are so far 20 per cent below average in India, worrying farmers hugely dependent on the monsoon.

India's economy and inflation levels also remain highly vulnerable to any sharp rise in global crude oil prices as New Delhi imports more than 80 per cent of its oil needs. "Let's fight the anti-inflation fight once and win it to create the best conditions for sustainable growth," he told reporters, insisting the RBI was not "anti-growth".

The central bank on Tuesday cut the statutory liquidity ratio, the amount banks must keep in government securities, by 50 basis points to 22 per cent, to free up funds for the banking system and spur economic activity. But the cash reserve ratio - the amount of cash deposits that banks must keep with the RBI - was held steady at 4.0 per cent.

Economists forecast a repo rate cut in future RBI meetings but differed on the likely timing. Vivek Rajpal, Nomura Singapore's Asia interest rate strategist, said a cut was likely in 2015, while Dean Martin, Asia Economist for research firm Capital Economics, said one could be expected this year.

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