India holds interest rates

The Reserve Bank of India has elected to keep interest rates at 8.5% following 13 increases in 2011.

Although the bank accepts that inflation rates and expectations are above “comfort level” the decision to hold the rate stems from a recent slowdown in economic growth.

“The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation”, said the bank in a statement today.

Headline Wholesale price index (WPI) inflation dropped from 9.7% in October to 9.1% in November, driven largely by declines in the price of food.

This downturn in the inflationary outlook may come as a welcome relief to the bank which has recently described soaring rates as “a serious concern”.

However, this decline is linked to a slowdown in GDP growth which itself stems from a “a sharp moderation in industrial growth”.

The index of industrial production fell by 5.1%, year on year, in October 2011 after serious contractions in manufacturing and mining activities.

The bank has admitted that past monetary policy tightening has contributed to this deceleration of GDP growth but assigns a larger portion of the blame to the uncertain global economic outlook; particularly the perceived failure of the EU summit to “assuage negative market sentiments”.

The bank will reassess its growth and inflation projections for 2011-12 in the third quarter review of January 2012.

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