Monday's decision by the Reserve Bank of India came amid a number of recent government reforms to spur growth, including steps to reduce its deficit and to attract more foreign direct investment.
Despite these developments, the RBI, more concerned by rising inflation, left its key rates unchanged while only announcing reduction in the CRR, which is the amount banks must keep with the central bank to meet emergency cash demands.
The industry now expects the interest rates to come down when inflation eases. India is Asia's third-largest economy after China and Japan.
In its announcement, the RBI said the reduction in the CRR should release enough money into the economy for banks to lend more to their borrowers.
The latest developments helped lift the Indian rupee, which has been falling sharply against the U.S. dollar in recent months. The Indian currency closed Monday at 54.01 to the dollar, up from 54.31 last Friday.
Some analysts told The Wall Street Journal the central bank was being cautious because of any likelihood of the government not being able to implement its newly announced measures such as allowing foreign supermarkets to come to India due to domestic opposition.
"In our view, the RBI would have been risking a very red face if it had cut today and then watched the proposed reforms being rolled back under severe political pressure," Credit Suisse economist Robert Prior-Wandesforde told the Journal.
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