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India Central Bank Keeps Rates Unchanged

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The Reserve Bank of India decided to leave its key interest rates unchanged on Tuesday as it awaits greater transmission of the effects of the previous three rate reductions into the economy.

The Reserve Bank of India, governed by Raghuram Rajan, maintained its repo rate at 7.25 percent and the reverse repo rate at 6.25 percent.

The repo rate is the rate at which the central bank lends to commercial banks and the reverse repo rate is the rate at which it accepts deposits from banks.

The repo rate currently is at its lowest level since 2013. The bank reduced its key rates by 25 basis points each in January, March and June.

The cash reserve ratio was kept unchanged at 4.00 percent.

Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy, the bank said.

According to the RBI, significant uncertainty will be resolved in the coming months including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions.

There is scope for one more 25 basis point cut in the current loosening cycle, Shilan Shah, an economist at Capital Economics, said.

With the currency crisis of 2013 still relatively fresh in the memory, aggressive easing from here would appear unlikely, particularly given that the US Fed is likely to begin tightening policy at some stage this year, the economist noted.

The bank said the outlook for growth is improving gradually. The economic growth outlook for 2015-16 was retained at 7.6 percent.

The Asian Development Bank expects India to expand 7.8 percent in fiscal 2015, underpinned by a healthy monsoon and investment.

Turning to the balance of inflation risks, the RBI said sustained hardening of inflation, excluding food and fuel, was the most worrisome. In June, consumer price inflation rose to 5.4 percent from 5.01 percent in May.

Nonetheless, the bank said the risks remain broadly balanced around the target of 6 percent for January 2016, and projections for January to March 2016 are lower by about 0.2 percent, reflecting prospects of softer crude prices and a near-normal monsoon.

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