India bank holds interest rates but boosts liquidity

RBI building in Mumbai, 24 Jan The central bank said the government had to address "policy uncertainty"

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India's central bank has left interest rates unchanged but moved to increase liquidity as it battles high inflation and the prospect of weaker growth.

The Reserve Bank of India (RBI) pointed to the government's "policy and administrative uncertainty" as one of the reasons for the economic problems.

It earlier cut its prediction for economic growth for the financial year to March from 7.6% to 7%.

The bank has raised benchmark rates 13 times since March 2010 to curb prices.

Inflation rose at 7.47% in December which, despite being a two-year low, is still well above government targets.

Growth concern

The RBI confirmed after its review meeting it was leaving the repo rate, at which it lends to commercial banks, at 8.5%.

In response, the main Sensex share index rose 1.5% by mid-afternoon.

In a strongly worded statement, the RBI said: "The global environment is only partly responsible for the weak industrial performance and sluggish investment activity.

Indian rupee notes The bank said it remained confident inflation would ease to 7% by March

"Several domestic factors - the unhealthy fiscal situation, high interest rates and policy and administrative uncertainty - are also playing a role.''

It added: "Policy and administrative actions, which induce investment that will help alleviate supply constraints in food and infrastructure, are critical.

"In the absence of credible fiscal consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending."

The bank announced a 50 basis point cut in banks' cash reserve ratio. This reduces the amount of money they are required to hold and is intended to stimulate lending.

As much as 320bn rupees ($6.4bn) could be released into the banking system.

The bank said it remained confident inflation would ease to 7% by March.

ING Vysya Bank economist Upasna Bhardwaj told Associated Press that the moves were largely expected but that the RBI's hands were tied on the supply side.

"The government has to do something,'' she said. "Huge fiscal expenditures are adding to the inflation scenario.''

In its earlier report, the RBI said that domestic growth had been hit by a number of factors.

"With growth decelerating even in emerging and developing economies, the spillovers from the euro area are likely to pull down global growth."

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