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May 27, 2017

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India's interest rate still 8%, cash reserve ratio drops by 0.25%

MUMBAI -- India's central bank left its key interest rate unchanged Tuesday, resisting growing pressure from New Delhi to kick start growth even as it slashed its growth forecast and raised its inflation projection for Asia's third-largest economy.

Though the Reserve Bank of India left the policy rate at 8 percent, it did trim the cash reserve ratio by a quarter of a point, to 4.25 percent, effective Nov. 3. It said this will inject 175 billion rupees into a cash-constrained banking system, which should improve the flow of credit and help rekindle growth.

RBI again slashed its growth outlook for the year ending March, from 6.5 percent to 5.8 percent. Its initial projection was 7.3 percent. The bank said headline inflation will likely hit 7.5 percent in March, up from an earlier forecast of 7 percent — and far above the bank's medium term target of 3 percent.

RBI has been under growing pressure from New Delhi and business leaders to cut interest rates as growth slipped to its lowest levels since 2009, but the bank says inflation remains its "primary focus."

"Managing inflation and inflation expectations must remain the primary focus of monetary policy," the bank said in its quarterly policy statement Tuesday. The bank said that containing inflation will contribute to consumer and investor confidence, both key to sustaining growth in the medium term.

It said there is a "reasonable likelihood of further policy easing" in the January to March quarter, provided inflation eases and New Delhi's ambitious reform agenda gets translated into action.

After peaking at 9.2 percent in the March 2011 quarter, India's economic growth slid to 5.3 percent a year later, its lowest level since the Great Recession in 2009. Though growth then ticked marginally higher, to 5.5 percent, RBI said the economy is still mired by stalled investment, weakening consumption and falling exports.

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