Reserve Bank of India leaves interest rates unchanged

The rising cost of food has been a threat to India's economic growth

India's central bank, the Reserve Bank of India (RBI), has left its key interest rate unchanged at 8% in a surprise move.

Most analysts and observers had forecast the bank would drop the cost of borrowing amid slowing growth.

India's economy grew at an annual rate of 5.3% between January and March, its slowest pace in nine years.

However the RBI said that a cut in interest rates would have put pressure on consumer prices.

"Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small," the central bank said in a statement.

"Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures."

'Delicate balancing act'

Rising consumer prices have been one of the biggest concerns for India's policymakers over the past two years.

The central bank took various measures in a bid to control the rising prices, including raising interest rates 13 times since March 2010.

While the inflation rate has come down slightly in recent months, it still remains higher than many of the other emerging economies.

According to data released last week, India's wholesale price index, the key measure of consumer prices in the country, rose by 7.55% in May from a year earlier.

Analysts said the combination of slowing growth and high inflation had made it difficult for the central bank to formulate its policies.

"The RBI obviously feels that inflation pressures remain too strong to ease policy further from here," said Jonathan Cavenagh of Westpac.

"It's a delicate balancing act though, as growth momentum is poor and policy remains too restrictive in our view, particularly given the weaker international backdrop."

Credit outlook

Also on Monday, credit rating agency Fitch downgraded its outlook for Indian debt from "stable" to "negative". This follows a similar move by Standard and Poor's in April.

Both agencies maintained India's crediting rating at BBB-, which is the lowest category of investment-grade sovereign debt.

It is feared that the negative outlooks from Fitch and S&P are a precursor to a full credit downgrade. That would make India the first G20 economy to have its debt relegated to "junk" status, which denotes a high-risk or speculative investment.