India surprises after keeping rates unchanged

Date: Monday 18 Jun 2012

The Reserve Bank of India (RBI) decided to maintain its key interest rates unchanged on Monday on the back of rising inflation despite calls for the central bank to ease policy as economic growth slows.

The repurchase rate was kept at 8% while the 4.75% cash reserve ratio for banks was also unchanged. Most economists were expecting at least a 0.25 percentage-point reduction in the repo rate.

Indian gross domestic product (GDP) expanded by just 5.3% in the first quarter of 2012, the slowest growth in nine years. As a result, the RBI was expected to lower rates in order to foster growth.

However, inflation concerns have prevented the central bank from taking a more accommodative stance.

The decision prompted Fitch Ratings to cut the country's sovereign credit outlook to 'negative', reflecting "heightened risks that India's medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened."

Fitch also said that the negative outlook also was due to India's "limited progress" on fiscal consolidation and cutting its deficit. The ratings agency maintained the credit rating at 'BBB-'.

"For some time, emerging economies have been growing faster than developed economies. This 'catch up' process has picked up further. However, we have been expecting a recouping process as Europe falls into recession," said analysts at Digital Look.

"Similarly, the US economy is also beginning to suffer from the Eurozone's problems as the latest macroeconomic data is showing signs of strain," they said.

FM/BC

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