MUMBAI, India (AP) — India's central bank held key interest rates steady as it struggles to foster growth amid high inflation, and took steps to curb currency speculation, lifting the rupee from all-time lows Friday.
The Reserve Bank of India kept the short-term lending rate, or repo rate, at 8.5 percent and the reverse repo rate — the rate it pays to banks for deposits, at 7.5 percent. The bank also kept the cash reserve ratio for commercial lenders unchanged at 6.0 percent.
"Downside risks to growth have clearly increased," the bank said in a statement. "However, it must be emphasized that inflation risks remain high."
Ambushed by a horde of reporters Friday, RBI governor Duvvuri Subbarao declined to say when the bank would start lowering rates.
"I cannot speculate on the timing because I don't know," he said.
Growth slipped to a two-year low of 6.9 percent in the September quarter and industrial production fell 5.1 percent in October, its first contraction since June 2009. But inflation remains above 9 percent.
The bank's 13 rate hikes since March 2010 have kept it out of step with many other emerging economies, which have started to ease monetary policy as global growth slows.
The Reserve Bank noted that Brazil, Indonesia, Israel and Thailand have all cut their policy rates, while China cut reserve requirements.
In India, the Reserve Bank has been waging a lonely — and largely ineffective — fight on inflation. New Delhi has failed to back the bank with fiscal consolidation or enact difficult policy changes that could unlock supply-side bottlenecks, pushing down prices and unleashing growth.
India is largely a cash economy, so rate hikes have little direct impact on most consumer demand. They do, however, hit investment, which can curtail supply and make inflation even worse.
"You've killed investment," said Jay Shankar, chief economist at Religare Capital Markets. "Supply responses have weakened significantly. Demand has not weakened. That's leading to inflation pressures."
He said "virtually nothing" is being done on the fiscal side to contain inflation.
He said by restoring excise and customs duties to the levels they were at before the 2008 global financial crisis, India could bring its fiscal deficit down from about 5.7 percent of GDP to 4.7 percent of GDP.
The central bank is now under enormous pressure from New Delhi and business leaders, who want a quick, politically expedient fix for flagging growth.
Businesses said they were disappointed Friday that the bank hadn't taken more drastic action.
"I would like to see RBI do a major rate cut now," B. Muthuraman, president of the Confederation of Indian Industry and vice chairman of Tata Steel, told CNBC-TV18 before the policy decision.
He said he would have liked the bank to cut rates by half a percentage point and reduce the cash reserve ratio to boost lending. That would help small and medium sized businesses — which are crucial to jobs and output in India's manufacturing sector — get more affordable financing to grow.
"Government inaction is a big cause of concern for industry," Muthuraman said, citing coal shortages, land acquisition difficulties and slow decision making. "We can have a growth rate in excess of 8 percent, if only we'd had reforms. It's a very sad story."
The rupee, which has been trading at record lows, strengthened Friday, after the central bank took to steps to curb speculation.
Since U.S. debt was downgraded Aug. 5, the rupee has fallen about 17 percent, breaching 54 to the dollar on Thursday.
Shankar said the depreciation of the rupee was alarming because of its speed, not its magnitude. India's inflation has been higher than that of its trading partners, so the rupee's depreciation normalizes inflation-adjusted exchange rates, helping Indian exporters, he said.
The bank has stopped short of massive intervention to prop up the currency, but it has lifted foreign investment limits in debt, raised rate ceilings on nonresident bank deposits, and enacted administrative measures to discourage speculation. Traders say the bank has also been selling dollars.
Meanwhile, India's NDTV reported that pilgrims in the southern city of Hyderabad were praying for divine intervention to stop the rupee's slide.
"All that the measures have done is to restrict the pace of INR depreciation," HDFC chief economist Abheek Barua said Friday. "The turn in the INR will only come once European sovereign concerns subside."
(Source- http://in.finance.yahoo.com)
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