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India's central bank holds rates at 6.25 per cent

Thursday, April 6, 2017 - 20:10

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India's central bank held interest rates on Thursday, in line with analysts' expectations, citing inflationary pressures from an imminent tax reform and the possibility of a poor monsoon.

[MUMBAI] India's central bank held interest rates on Thursday, in line with analysts' expectations, citing inflationary pressures from an imminent tax reform and the possibility of a poor monsoon.

The Reserve Bank of India (RBI) said the benchmark repo rate - the level at which it lends to commercial banks - would remain at 6.25 per cent.

It was the third consecutive monetary policy committee (MPC) meeting in India's financial capital Mumbai where rates have been left unchanged.

RBI governor Urjit Patel said a new national goods and services tax (GST) due to be introduced on July 1 could push inflation up, while a weak monsoon could lead to a poor harvest and a rise in food prices.

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"(There is) the uncertainty surrounding the outcome of the south west monsoon in view of the rising probability of an El Niño event around July-August, and its implications for food inflation," Mr Patel said in the statement.

"Another upside risk arises from the one-off effects of the GST," he added, referring to the new tax which will transform India's economy into a common market.

The RBI forecast inflation for the first half of fiscal year 2017-18 to be 4.5 per cent, rising to 5 per cent for the second half. It has a target of keeping inflation around four per cent.

All 52 economists surveyed by Bloomberg News had predicted that the rate would remain unchanged, largely because of an excess of liquidity in the banking system following a high-profile cash ban.

The government's shock decision to remove high-denomination currency notes from circulation in November saw consumers rush to deposit their old bills before they became worthless.

Large amounts of deposited cash can lead to a rise in inflation if banks start using the money to increase lending. Low interest rates fuel consumer spending, which also causes an uptick in inflation.

The RBI raised the reverse repo rate, the level at which commercial banks lend money to the central bank, by 25 basis points. The increase will encourage banks to lend more to the RBI, thereby helping to mop up their excess liquidity.

"Our endeavour is to remain draining out liquidity," Mr Patel told reporters, adding that the MPC had "unanimously" agreed to hold the main rate.

The central bank last cut the interest rate in October when it was reduced by 25 basis points to 6.25 per cent, the lowest level since November 2010, and analysts don't expect a rush towards another snip.

"I think the RBI will wait for a couple of quarters, see how the recovery from demonetisation and the monsoon pans out, see what's happening globally, and then take a call," said Ashutosh Datar, an economist at IIFL Institutional Equities.

AFP

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