India central bank keeps rates on hold in surprise move

India central bank keeps rates on hold in surprise move

MUMBAI-Agence France-Presse
India central bank keeps rates on hold in surprise move

India's central bank kept interest rates on hold on Dec. 5, defying expectations of a sixth consecutive cut this year to jumpstart the economy after quarterly growth plunged to its lowest level since 2013.

The Reserve Bank of India (RBI) said the benchmark repo rate -- the level at which it lends to commercial banks -- would remain unchanged at 5.15 percent, a nine-year low.

The central bank, however, slashed its annual growth forecast to 5 percent from 6.1 percent, as consumer demand and manufacturing activity contracts.

India's economy grew at its slowest pace in more than six years in the July-September period, down to 4.5 percent from 7.0 percent a year ago, according to government data.

Though high by Western standards, that is well below the level needed for India to provide the millions of jobs required each year for new entrants to the labour market, posing a major headache for Prime Minister Narendra Modi.

Economists surveyed by Bloomberg News had largely predicted the central bank would cut interest rates by 40-50 basis points to help the economy recover after a dismal year.

But a sudden spike in retail inflation to 4.62 percent -- beyond the central bank's target of four percent -- may have encouraged the RBI to hit pause on further rate cuts as Modi's government struggles to kickstart what was once the world's fastest growing major economy.

Finance Minister Nirmala Sitharaman has announced a slew of reforms including easing restrictions on foreign investment in key sectors, slashing corporate taxes, and launching a privatisation drive aimed at reviving moribund state firms.

But the measures have failed to raise confidence so far, economists say. Demand for everything from cereals to cars has plummeted while unemployment has hit a four-decade high.

RBI governor Shaktikanta Das -- seen as a Modi ally -- has cut interest rates five times in a row starting from February 2019, bringing them down by 135 basis points.

But debt-ridden banks have not reduced their lending rates, and so failed to pass on the benefits to consumers.

The lack of credit, coming after the collapse of India's shadow banking sector, has created a contagion of crisis, analysts say.