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India seen holding rates to guard against inflation

30 september 2014, 14:36
0

  India's central bank will keep interest rates on hold Tuesday as it awaits more proof that stubborn high inflation is headed downward in Asia's third-largest economy, analysts forecast, AFP reports.

Reserve Bank of India (RBI) chief Raghuram Rajan insists "the back of inflation" must be broken before the central bank starts cutting rates.

"Inflation pressures seem to be easing and fears of the impact of a deficient monsoon too are abating," said Rajiv Biswas, chief Asia economist at global consultancy IHS.

"But the RBI will look for signs that show the slowdown in price rises is sustainable" before reducing rates, Biswas said.

Business leaders have been clamoring for the bank to ease rates to bring down steep borrowing costs and spur sluggish economic growth.

India's wholesale price inflation fell to a near five-year low in August, but retail inflation, keenly followed by the RBI, is hovering at close to eight percent.

The RBI hopes to get retail inflation down to six percent by January 2016.

Rajan has promised not to keep India's benchmark lending rate at its current level of eight percent for a "second" longer than necessary.

The central bank has hiked India's trend-setting lending rate, known as the repo, three times since Rajan was installed as governor a year ago.

Nicknamed "The Guv", Rajan has been praised for tackling inflation, stabilising India's currency, the rupee, and boosting investor confidence since taking over the bank.

India's right-wing government, which took office in May, is keen to see interest rates fall to fulfil an election campaign promise to accelerate economic growth.

The economy expanded by 5.7 percent in the first quarter of the financial year from the same period a year earlier -- the best quarterly performance in over two years.

But economists say India needs at least eight-to-nine percent growth to create jobs for its ballooning youth population.

Prime Minister Narendra Modi has been promising to roll out the red carpet for foreign investors during his current US visit as he seeks money for projects to overhaul India's dilapidated roads, railways and other infrastructure and promote growth.

A sharp narrowing of India's current account deficit -- the broadest measure of trade -- has improved the country's public finances and lifted investor sentiment.

Modi has already sought to speed up notoriously slow government decision-making and slash India's bureaucratic red tape that has been delaying projects.

"Hard-selling of India needs to be translated into action on ground," said YES Bank chief economist Shubhada Rao.

Most analysts do not expect any cut in Indian interest rates until at least the start of calendar 2015.


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