Mumbai - India's central bank kept interest rates on hold Tuesday, saying it was worried inflation in Asia's third-largest economy may not cool as fast as hoped.
The Reserve Bank of India (RBI) maintained the benchmark repo rate, at which it lends to commercial banks, at a steep 8.0 percent, in line with analysts' expectations.
“There are risks from food price shocks as the full effects of the monsoon's passage unfold, and from geo-political developments that could materialise rapidly,” RBI governor Raghuram Rajan said after a monetary policy meeting in Mumbai.
Wholesale price inflation fell to a near five-year low in August, but retail inflation, which the RBI closely tracks, is hovering at close to eight percent.
Business leaders have been clamouring for a rate cut to bring down steep borrowing costs to spur sluggish economic growth.
But Rajan has been firm that inflation must be tamed first.
He said he was confident of pushing retail inflation below eight percent by January next year, but said it would be “hard” to reach the target of six percent the following year.
“There's a fair amount of work that needs to be done,” he said, adding he was unsure what course monetary policy would take.
The central bank has raised the repo rate three times since Rajan, nicknamed “The Guv”, was installed as governor a year ago.
He has promised not to keep India's benchmark lending rate high for a “second” longer than necessary, but he also did not rule out a rate hike Tuesday, saying he would “tighten screws” if necessary.
“The underlying tone of the RBI without a doubt remains hawkish,” Bank of Baroda chief economist Rupa Rege Nitsure said.
Rajan has been praised for his tough line against inflation, which hits India's hundreds of millions of poor hardest, as well as for stabilising the country's currency.
India's right-wing government, which took office in May, is keen to see interest rates fall to help it fulfil its election promise to accelerate 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 more than two years.
But economists say India - with three quarters of a billion people under the age of 35 - needs to return to at least eight-to-nine percent growth to create jobs for its young people.
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 infrastructure and revitalise growth.
Modi has already sought to speed up notoriously slow government decision-making and slash red tape that has been delaying projects.
But now “hard-selling of India needs to be translated into action on (the) ground,” said YES Bank chief economist Shubhada Rao.
Stocks showed little reaction to the central bank's decision to keep rates steady. - Sapa-AFP