Text size:

  • Small
  • Normal
  • Large
A vegetable market in Ahmedabad. The monsoons have not brought enough rain and food inflation could rise as a consequence. Ajit Solanki / AP Photo
A vegetable market in Ahmedabad. The monsoons have not brought enough rain and food inflation could rise as a consequence. Ajit Solanki / AP Photo

India keeps rates steady on concern of inflation

India Dispatch: Despite the Indian government's recent flurry of economic reforms sparking hopes for a rate cut, the country's central bank has chosen to keep interest rates on hold.

MUMBAI // Despite the Indian government's recent flurry of economic reforms sparking hopes for a rate cut, the country's central bank has chosen to keep interest rates on hold.

The Reserve Bank of India (RBI) is grappling with the problem of balancing slowing economic growth and high inflation. In situations of high inflation, interest rates are normally increased to bring inflation under control. Raising borrowing costs, however, was not an option for the central bank given the slowdown in the country's economy.

The policy repo rate was kept on hold at 8 per cent, in line with consensus forecasts, as the central bank yesterday said it remained focused on fighting inflation.

But economic reforms announced last week raised hopes of a cut to help boost growth.

"In its forward guidance, the RBI basically said that its hands are tied at the moment due to lingering inflation risks and the persistence of the twin deficits [fiscal and current account deficits], leaving little room to ease monetary policy," said Leif Eskesen, HSBC's chief economist for India and Asean (Association of South East Asian nations). The central bank lowered the cash reserve ratio by 25 basis points in an effort to inject more liquidity, estimated at about 170 billion rupees (Dh11.56bn), into the system.

"The decision to keep the monetary policy rate unchanged was spot-on and the prudent thing to do," said Mr Eskesen. "Inflation risks are still lingering. The monsoons remain deficient despite more rain in recent weeks and food inflation is expected to rise as a consequence. The adjustment in fuel prices will also add to inflation and possibly lift inflation expectation."

The government last week reduced fuel subsidies as it hiked diesel prices by 5 rupees per litre.

The wholesale price inflation rate eased to a 32-month low in July of 6.87 per cent, only to increase to 7.55 per cent last month on higher food and energy prices.

Economic growth slowed to 5.5 per cent in the first quarter of the financial year. While that might seem an enviable rate in other parts of the world, the consensus in India has been the country needs a persistent growth rate in the region of 8 per cent for the benefits of an expanding economy to spread to the lower-income segments of its population.

The government reforms included measures to open up the retail and aviation sectors to more foreign investment.

"While acknowledging the recent positive initiatives by the government, RBI believes that inflation momentum remains fairly strong," said Dhananjay Sinha, the co-head of institutional research at Emkay Global Financial Services.

business@thenational.ae

Back to the top

More articles


Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Above, the private pool of Ocean Heights' five-bedroom penthouse flat. Courtesy Christie’s International Real Estate

In pictures: Penthouse flat is height of Dubai luxury living

A five-bedroom penthouse in Ocean Heights in Dubai Marina is on sale for Dh25 million and comes with a private pool and an unparalleled view of Dubai.

 The cooling towers of the Temelin nuclear power plant near the Tyn nad Vltavou in Czech Republic. The country wants to continue expanding nuclear energy capacity despite cancelling a tender to build two new units. David W Cerny / Reuters

In pictures: Best business images for the week to April 17, 2014

Here are some of the best business images for the week to April 17, 2014.

 Three generations of the Hakimi family tend to their stall Crawford Market in Mumbai. Subhash Sharma for The National

In pictures: Shopper’s delight at Crawford Market in Mumbai

Crawford Market is an old British-style covered market dealing in just about every kind of fresh food and domestic animal imaginable. Later on renamed Mahatma Jotirao Phule, the market remains popular among locals and visitors by its old name, taken from Arthur Crawford who was the first municipal commissioner of the city.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.

Events

To add your event to The National listings, click here

Get the most from The National