RBI surprises by keeping interest rates on hold

MUMBAI (Reuters) - The Reserve Bank of India (RBI) unexpectedly kept the country's policy interest rate on hold on Wednesday, despite calling current inflation too high, citing the prospect of easing retail prices and its concerns about the weak domestic economy.

The RBI had been widely expected to lift its repo rate by 25 basis points, but instead opted to keep the country's main lending rate at 7.75 percent.

"The policy decision is a close one. Current inflation is too high," said the RBI in its policy statement.
However, the RBI also cited its reluctance to over-react given the "wide bands of uncertainty" surrounding the outlook for inflation amid signs of sharply falling vegetable prices and "the weak state of the economy."

Still, the central bank said it would remain vigilant on inflation and that it would be ready to act even in between policy reviews should headline or core inflation not ease as expected, albeit in a "calibrated" manner.

The RBI added it would gauge the impact of any decision by the U.S. Federal Reserve to withdraw its monetary stimulus. The U.S. central bank concludes its policy meeting later in the day.

"There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the U.S. Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation. The Reserve Bank will be vigilant," it said.

The RBI had raised interest rates by a quarter percentage point at its previous reviews in September and October. No review was held in November.

(Reporting by Suvashree Dey Choudhury; Editing by Rafael Nam)