The Reserve Bank of India (RBI) left interest rates unchanged on Thursday, citing concern over resurgent inflation risks, even as economic growth remains sluggish.
The RBI kept its policy repo rate on hold at 8.50 percent, as had widely been expected. It also kept the cash reserve ratio unchanged at 4.75 percent after cutting it by 75 basis points on Friday in a surprise out-of-cycle move.
"Upside risks to inflation have increased from the recent surge in oil prices, fiscal slippage and rupee depreciation," the RBI said in its mid-quarter policy statement.
The central bank raised rates 13 times between March 2010 and October 2011, making it one of the world's most hawkish central banks. It has pressed the pause button on rates since December.
"Notwithstanding the deceleration in growth, inflation risks remain which will influence both the timing and magnitude of future rate actions," the RBI said.
Still, it said India's economic performance in the March quarter of the fiscal year ending this month is expected to be better than the previous quarter.
Bond and interest rate swap markets were disappointed as the RBI continued to focus on inflation risks.
The 10-year benchmark bond yield rose 4 basis points to 8.34 percent immediately after the policy release while the benchmark five-year swap rate was 6 basis point higher at 7.55 percent, and the one-year rate 7 basis points up at 8.12 percent.
"It would not have made sense to cut policy rates before the budget because it will give a roadmap on fiscal consolidation, and that will be a relevant policy contributor," said Rupe Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
The union budget will be presented on Friday.
The RBI's tightening took a toll on economic growth, which slowed to 6.1 percent in the three months to December, the weakest in almost three years.
A Reuters poll which showed the RBI was widely expected to hold interest rates steady at its policy review on Thursday also found that expectations for a start to the rate cut cycle have been pushed back since January.
India's headline inflation picked up for the first time in five months in February on higher food costs but another measure of price pressures cooled, sparking market speculation of a surprise rate cut on Thursday.
On average, economists estimate growth in the fiscal year ending in March 2013 will be 7 percent, a far cry from the 9 percent pace of expansion that policymakers in Asia's third-largest economy had expected a year ago.
