India keeps key interest rates unchanged

Posted 01 29 2008 8:30PM

MUMBAI (AFP) - India's central bank on Tuesday held key interest rates steady, saying the risk of higher inflation had increased amid global threats to economic growth and financial stability.

The Reserve Bank of India kept its repo rate -- the lending rate to banks -- unchanged at 7.75 percent, and left the amount of cash banks must set aside as reserves at 7.50 percent.

Analysts had expected the central bank to soften the hawkish stance it has taken since 2004, or even cut borrowing costs, after the Federal Reserve's emergency interest rate cut last week amid fears of a US recession.

"The upside pressures on inflation have become potent and more real," central bank governor Y.V. Reddy said in a statement, adding recent events had showed a persisting threat to "growth and financial stability worldwide."

The comments indicated that keeping consumer prices in check was the central bank's major concern, said Edelweiss Capital economist Manika Premsingh.

"Never has the governor been so hawkish on inflation. The bank is also concerned about capital flows, which though weak at the moment, could rise following the US rate cut," Premsingh said.

The central bank was unlikely to cut rates until the second half of 2008, she added.

There is now a wide difference between Indian interest rates and current US borrowing costs of 3.50 percent, which could lure more foreign cash into India and send the rupee higher, said JP Morgan Chase economist Rajeev Malik.

"India's growth momentum does not warrant lower interest rates but the widening interest rate differential could be more problematic," Malik said.

The rupee has already risen more than 12 percent against the dollar in the past year, making life more difficult for India's exporters. US rates are expected to be cut again this week.

The Indian stock market fell 0.71 percent to 18,024.74, led by banking shares, after the central bank's rate decision.