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India keeps key interest rates on hold ahead of election

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MUMBAI: India’s central bank kept key interest rates steady in a widely anticipated move less than a week before the start of national elections.
After a meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would remain at 8.0 percent.
“At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy,” RBI governor Raghuram Rajan wrote in his statement.
The RBI last raised rates on January 28, the third hike since September last year as part of its battle against high inflation.
Most economists had predicted Tuesday’s decision as India’s most widely watched inflation measure — the Wholesale Price Index — fell to a nine-month low of 4.68 percent in February from 5.05 percent a month earlier.
Rajan remained concerned by retail inflation, however, due to the possibility of a weaker-than-normal monsoon and adjustments to state-controlled prices of agricultural commodities.
Economists had underlined that India’s parliamentary elections, set to begin next Monday, would make the RBI cautious about making any changes to its policy.
“RBI is facing a lot of uncertainties. The question of whether we will get a stable government or not is yet to be answered,” Rupa Rege Nitsure, chief economist at Bank of Baroda, told AFP.
Opinion polls point to the main opposition Hindu nationalist Bharatiya Janata Party (BJP), led by conservative hawk Narendra Modi, winning the elections which end in May.
Foreign investors have driven up the Indian stock market in recent months, expecting a more business-friendly government to take over from the scandal-tainted Congress party.
Congress has become deeply unpopular after a decade in power over a string of corruption scandals and the slowing economy, which is expanding at its slowest rate in a decade.
Despite the economic slowdown, economists do not foresee rate cuts.
“We are staring at a long pause (on rates). Uncertainty on inflation will keep RBI on its toes and prevent rate cut even in if industrial slowdown sharpens,” Baroda’s Nitsure said.
Some believe the rate cycle in India has not yet peaked.
“I am not sure 100 percent that we are in a pause,” said senior economist Arun Singh from US business information group Dun & Bradstreet.
“Upside risks to inflation are clearly visible. The RBI is focused on controlling inflation and it has already said price rise needs to be controlled for sustainable growth. So, further tightening cannot be ruled out.”
India’s economy is likely to grow at between 5.0-6.0 percent in 2014-15 but faces downside risks, the central bank said.
India’s equity markets reacted little to the RBI decision with the benchmark index of the Bombay Stock Exchange continuing to hover 0.21 percent or 47.97 points lower at 22,340.45 points.
India’s currency and bond markets were closed for a holiday.