India's central bank keeps its key interest rate unchanged at 8.5% amid inflation concerns; finance minister says growth for this fiscal year will be 6.9%, one of the lowest in the past decade
March 15, 2012
– India's central bank kept its key interest rate on hold Thursday, warning that inflation remains a risk despite slowing growth in Asia's third largest economy.
In a separate announcement, India's Finance Ministry projected that growth next fiscal year would pick up to 7.6 percent. It said growth for the fiscal year ending in March would be 6.9 percent, one of the worst performances in the past decade.
The Reserve Bank of India kept its short-term lending rate unchanged at 8.5 percent. The cash reserve ratio, which regulates the proportion of deposits banks must hold as reserves, was held at 4.75 percent. The bank slashed the reserve ratio by three quarters of a percentage point last week.
The central bank warned that high oil prices and India's growing budget deficit are adding to inflation pressures, even as a sluggish global economy, particularly in Europe, threatens growth. The benchmark Sensex index closed down 1.4 percent, at 17,676.
"Upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippage and rupee depreciation," the bank said in a statement. "Notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions."
The Reserve Bank hiked its key interest rate 13 times in a row before pausing in October, as the effects of monetary tightening began to be felt in the slowing economy.
Indian businesses were disappointed. Many complain that high interest rates and aggressive government borrowing have made it difficult for them to get the affordable credit they need to grow.
Chandrajit Banerjee, director general of the Confederation of Indian Industry said he had hoped for a rate cut. "Industry needs strong easing signals from the RBI in order to ensure that investments pick up," he said. "Capital creation in the economy has been growing at a negative pace and this does not bode well for the growth outlook of the economy."
The Finance Ministry sought to portray the economic slowdown as temporary. It predicted that India's economy would grow 7.6 percent next fiscal year and hit 8.6 percent growth in the fiscal year ending March 2014, barring any international crises or abnormal monsoons that could affect agriculture.
The government also said it would miss its budget deficit target of 4.6 percent of gross domestic product due to the unexpected economic slowdown as well as high crude oil prices, which increases the government's fuel and fertilizer subsidy bill.
It also blamed poor market conditions that have disrupted plans to raise funds by selling stakes in state-run companies.
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