Central Banks

Reserve Bank of India leaves key rate steady at 8%

The Reserve Bank of India's monetary policy committee raised the key lending rate or the repo rate to 5.40%.
Vivek Prakash | Bloomberg | Getty Images

India's central bank on Tuesday left its key interest rate steady at 8 percent, following its first meeting after a landslide election win for the Bharatiya Janata Party (BJP).

In a statement, the Reserve Bank of India (RBI) said further policy tightening would not be warranted if the economy continues on a disinflationary path.

At the same time, the RBI took steps to raise the availability of credit, reducing the mandatory amount of bonds lenders must park with the central bank - called the statutory liquidity ratio - by 50 basis points to 22.5 percent of deposits from mid-June.

The RBI has raised interest rates three times since September to help contain inflation.

Fighting inflation is expected to remain the central bank's priority and that could put it at odds with India's new government, led by Narendra Modi, which has pledged to revive the country's growth prospects.

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Data released last week showed India's economy grew an annual 4.6 percent in the first quarter to mark a second straight fiscal year of sub-5 percent growth.

Why price stability will be key for the RBI
Why price stability will be key for the RBI

RBI Governor Raghuram Rajan last week met with India's new Finance Minister Arun Jaitley. Rajan has stressed the importance of balancing growth and inflation and said he would work closely with the new government, according to a report from Reuters.

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"Rajan has stood his ground on inflation quite rightly," Vishnu Varathan, a senior economist at Mizuho Corporate Bank, told CNBC ahead of the rate verdict.

"Rajan has shifted the goal posts and said there will be inflation targeting so there's more likely to be a hike in rates then a cut at this stage," he added.

Following a recommendation from a central bank panel in January, the RBI said it would aim to bring down consumer price inflation to 8 percent by January next year and 6 percent the following year.

Many economists expect the central bank to leave monetary policy on hold for the remainder of the year.

Neil Mellor, currency strategist at BNY Mellon told CNBC's "Squawk Box Europe" that India needs to control inflation, which remains a fundamental problem.

"There's great hope when a new leader comes in, but there's still a lot of work to do," he said.

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Indian stocks widened their gains following the RBI decision. The benchmark Sensex hit a one-week high while the declined against the greenback, trading in sight of a new one-month low.