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RBI expected to hold rates on cooling inflation

Last month, the Reserve Bank of India surprised markets by holding its key interest rate at 7.75 percent even after inflation accelerated to a 14-month peak.

New Delhi: India`s central bank Reserve Bank of India (RBI) is expected to keep borrowing costs unchanged on Tuesday for a second time in a row, with inflation slowing and the economy stuck in a low-growth rut.

Last month, the Reserve Bank of India surprised markets by holding its key interest rate at 7.75 percent even after inflation accelerated to a 14-month peak.

Bank Governor Raghuram Rajan said at the time there was "reason to wait before determining the course of monetary policy" given forward-looking indicators suggesting inflation might cool.

Rajan`s hopes bore fruit when Wholesale Price Inflation -- the most widely watched price barometer -- fell to 6.16 percent in December from a year earlier, down sharply from 7.52 percent the previous month, according to data last week.

"Further relief is expected on the (wholesale price) inflation front," said Shubhada Rao, chief economist at private Yes Bank.

"The increase in core inflation is not alarming and the weak growth momentum is likely to continue as we are riding an election cycle," she said.

"Thus, we expect a prolonged pause on rates in 2014," Rao said.

The bank is expected to announce its decision at 11:00 am (0530 GMT).

India must hold by May general elections in which the scandal-tainted Congress-led government of Prime Minister Manmohan Singh is expected to fare poorly.

The government is desperate for signs of a turnaround with the economy expected to grow by some economists at under five percent, a far cry from its previous heady near-double digit pace.

India`s industrial output shrank an unexpected 2.1 percent in November year-on-year, data this month showed.

Business has been clamouring for the central bank to reduce interest rates to spur investment and breathe new life into the economy.

Some analysts believe the central bank will maintain a hawkish inflation tone even if it opts to hold the benchmark repo rate.

They argue inflation remains a concern, import-reliant India is still vulnerable to foreign energy supply shocks and contours of the next government remain hazy.

"There may not be a party with a clear majority or even a near majority," Finance Minister P. Chidambaram warned global leaders at the World Economic Forum at Davos earlier in the week.

"It may turn out to be a fractured parliament -- and which government will come out of that I cannot say," he added.

But he said the government had taken steps to put the nation`s financial house in order.

"Fiscal consolidation has taken place, there`s more FDI (foreign direct investment) flowing into India. We`ve added to our reserves," he said.

The Hindu nationalist Bharatiya Janata Party (BJP) is banking on its prime ministerial candidate Narendra Modi, seen as business-friendly, to return it to power after a decade in opposition.

But worries about how India will fare as the US rolls back its easy money policies pushed Indian shares down sharply Monday and drove the rupee to a more than two-month low against the dollar.

From Zee News

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