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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 raise the repo rate on Wednesday, after lifting the country's main lending rate by 25 basis points each at its previous reviews in September and October. It instead opted to keep the country's main lending rate at 7.75 percent.
Benchmark 10-year bond yield dropped 12 basis points to 8.78 percent from levels before the decision, while the NSE share index gained more than 1 percent. The Indian rupee strengthened.
However, the central bank warned 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 noting it would do so in a "calibrated" manner.
The RBI added it would also gauge the impact from any decision by the U.S. Federal Reserve to start withdrawing its monetary stimulus. The U.S. central bank concludes its policy meeting later in the day.
"The policy decision is a close one. Current inflation is too high," said the RBI in its policy statement.
"However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."
The most recent data showed consumer prices posted their biggest annual rise on record in November - 11.24 percent - while wholesale inflation hit a 14-month high last month.
Surging inflation are being driven by higher vegetable prices that hurt the country's poor the most, and are thus posing another headache to the embattled Congress party, which is facing general elections due by May, and was drubbed in recent state polls.