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Last Updated: Tuesday, 18 April 2006, 07:38 GMT 08:38 UK
Surprise at Indian rates freeze
Volvo factory in Hoskote, near Bangalore
Indian ministers believe there is no investment bubble
India has kept a key short-term interest rate on hold, surprising experts who had expected further action to control inflationary pressures.

India's central bank froze its reverse repo rate at 5.5%, ignoring calls by some economists for another rise after January's quarter point boost.

However, the Bank did admit that rising energy costs presented a threat to long-term financial stability.

The government had opposed a rate rise, believing inflation was under control.

Ministers said that rising borrowing costs could choke the country's strong economic growth.

Credit surge

The Indian economy grew by 8.1% last year and some ministers believe that annual expansion of 10% is attainable.

The factors impinging on higher rates are still intact
Indranil Pan, chief economist at Kotak Mahindra Bank.

The Bank has taken a different view, believing inflation remains a threat, and has lifted rates four times since the end of 2004.

In its latest review of the economy, the Bank said it expected output to grow by between 7.5% and 8% in 2006-7.

The global economy was resilient while Indian's own fiscal position had improved, it noted.

But it warned that volatile oil prices, geopolitical risks and global economic balances presented a threat to financial stability.

"It is becoming increasingly clear that the impact of increasing oil prices to the consumer has still to be felt," said Governor Venugopal Reddy.

Defying expectations

An increase in rates had been expected after Bank officials said last month that credit levels were rising sharply and that share prices and other investment assets were overvalued.

Credit issued has grown by 30% as Indian companies have borrowed aggressively to expand.

At the same, rising global oil prices have pushed up energy costs, a burden to India which imports 70% of its energy.

But headline inflation fell back below 4% after January's rate rise, prompting finance minister Palaniappan Chidambaram to warn against further rates increases.

Economists said Tuesday's decision was unexpected and that bank officials would have to keep a close eye on energy and asset prices.

"The factors impinging on higher rates, high global crude oil prices, rising asset prices and high credit-deposit ratio, are still intact," said Indranil Pan, chief economist at Kotak Mahindra Bank.

Long-term interest rates, which determine rates of lending to commercial banks, were kept at 6%.




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