India's central bank keeps interest rates on hold in first review since election

MUMBAI, India – India’s central bank kept key interest rates unchanged on Tuesday in its first policy review since a new, pro-business government took power.

Reserve Bank of India Governor Raghuram Rajan has made curbing inflation his priority in the nine months since he took the reins of the bank. He has steadfastly resisted pressure to cut interest rates to try to kick-start sluggish economic growth.

He left the key repo interest rate at which banks borrow from the central bank at 8 per cent. Rajan recently met new Prime Minister Narendra Modi and the rate decision may have been no surprise to the government.

Rajan has argued that reviving economic growth requires economic reform and that slashing interest rates would do little except encourage consumer inflation that last year reached double digits.

The central bank has set a goal of bringing consumer price inflation down to 8 per cent by next January. In April, the rate was 8.6 per cent.

While the bank warned that a forecast light monsoon season could add to food price inflation, it said in its policy statement that if prices fall faster than expected “it will provide headroom” for cutting interest rates.

The central bank’s openness to lowering rates in the future was a surprise, said HSBC strategist Mahak Choudhary in a commentary.

He said that the wait-and-see approach may indicate that Rajan has been assured that the new government will focus on reining in its budget deficit and instituting reforms to spur growth.