Reserve Bank Holds Interest Rates Steady to Fight Inflation In spite of growing calls for it to support India's slowing economy, the Reserve Bank of India said on Monday it would not cut interest rates or lower banking reserve requirements because inflation was still too high for it to act. Rather, the central bank threw the ball into the government's court, calling on it to cut its fiscal deficit and do more to ease ""supply bottlenecks"" that restrict farmers, factories and others from producing enough to meet the rising demand for food, manufactured goods and other products. Many analysts and bankers had hoped the central bank would cut its benchmark interest rate, at which it lends money to banks, by 0.25 percentage point and to lower its cash reserve ratio by as much as 1 percentage point, which would free up banks to lend more money to businesses and consumers. In April, the central bank cut the benchmark rate by a more-than-expected 0.50 percentage point, to 8 percent; it has also lowered the reserve ratio several times in recent months from a high of 6 percent, to 4.75 percent. In explaining its decision, the central bank said cutting interest rates further would have done little to support investment and growth, and rather would have pushed prices even higher. In recent months, India's wholesale price index has been rising by more than 7 percent from a year earlier, even as the economy slowed to a 5.3 percent year-on-year growth rate in the first three months of the year, down from 9.2 percent in the same period a year earlier. ""Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small,"" the Reserve Bank of India said in astatement. ""Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures."" The statement appeared to surprise investors and analysts, many of whom have grown increasingly pessimistic about the Indian economy and thought that the central bank would have felt compelled to cut rates. The benchmark Nifty 50 stock index was down about 1 percent around noon local time. But the central bank stuck to a strong anti-inflationary stand and, as it has done several times in recent months, blamed New Delhi for not doing enough to help the economy. On Monday, the central bank said the government's high fiscal deficit, particularly its spending on fuel subsidies, was ""crowding out public investment at a time when reviving investment, both public and private, is a critical imperative."" ""A lot depends on the government taking credible, concrete steps to revive investments in the economy,"" said Shubhada Rao, the chief economist at Yes Bank in Mumbai. ""Interest rates will play a limited role in spurring investments."" The bank's criticism comes at a time when New Delhi is in the midst of a major transition in economic policy making. The country's finance minister, Pranab Mukherjee, is getting ready to stand in an election to become president, a largely ceremonial post that has some important constitutional powers. It is unclear who will replace him, but many analysts and Indian journalists have speculated that the Prime Minister Manmohan Singh, a former finance minister, will decide to take on that position as well, at least for a few months. Still, regardless of who becomes finance minister, analysts say Mr. Singh's government will have a difficult time following the central bank's prescription of cutting subsidies, reducing the fiscal deficit and reducing supply constraints - a collection of overhauls that this government has struggled to make in the last three years since being re-elected.