India's central bank keeps rates on hold as commercial lenders fail to move on previous cuts

MUMBAI (AFP) - India's central bank kept interest rates on hold Tuesday, saying most commercial lenders have yet to pass on two previous cuts to customers in Asia's third largest economy.

After meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate - the level at which it lends to commercial banks - would remain unchanged at 7.50 per cent.

The decision was widely expected by economists who said the RBI would remain cautious until the impact on food prices of crop damage from earlier-than-expected rains becomes clear.

Rising food prices are a critical issue in India where even minor increases cause hardship for its tens of millions of poor.

But RBI governor Raghuram Rajan said the decision was also based on the fact that commercial banks have been reluctant to lower their own lending rates.

The RBI has already cut rates twice this year in a bid to kickstart lending to businesses and boost economic growth to help create jobs for millions of young people.

But only a few of India's banks - saddled with bad loans and seeing lower profits - have passed them on to customers.

"Transmission of policy rates to lending rates has not taken place so far," Rajan said.

"With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the RBI will maintain status quo in its monetary policy stance in this review," he said in a statement.

India's consumer price inflation inched up to 5.37 per cent in February from a year earlier, a figure that is within the RBI's target of between two and six percent.

Rajan has made controlling inflation a priority since taking the helm of the bank, resisting calls to reduce interest rates.

As well as inflation, the RBI has previously said that further cuts were also dependent on Prime Minister Narendra Modi's government containing the fiscal deficit.

Modi's right-wing government swept to power at general elections last May pledging to reform and revive the economy.