Mumbai, April 18:

The Reserve Bank of India kept interest rates unchanged on Tuesday, contrary to expectations, as it warned that rising oil prices present a continuing threat to inflation.

Analysts had widely expected the central bank to hike short-term interest rates by 25 basis points for a third consecutive quarter given concerns that record oil prices and booming asset markets would stoke inflation. Instead, the central bannk kept key short-term rates at 5.5 per cent and long-term bank rates unchanged at a three-decade low of 6.0 per cent.

“It is becoming increasingly clear that the impact of increasing oil prices to the consumer has still to be felt,” RBI governor Y V Reddy said in the central bank’s latest quarterly review of the economy. “The outlook on inflation and the choice of the appropriate manner of dealing with the impact of rising oil prices remains clouded at present.” The benchmark Mumbai stock exchange Sensex index gained sharply after the decision, rising up 254.19 points or 2.20 per cent at 11,793.87 in early afternoon trade.

The RBI said India, which imports 70 per cent of its energy needs, was particularly vulnerable to rising global oil prices. India heavily subsidises kerosene and cooking gas, which lag far behind costs globally, and analysts expect this will prove unsustainable. Prices are likely to rise sharply when and if subsidies are reduced.

The RBI decision came as crude oil prices crept closer to record highs.

Inflation in India, as measured by the weekly wholesale price index, has fallen from around 5.0 per cent to 3.96 per cent in the week ended March 25. Analysts, however, expect it to spike to as high as 5.5 per cent for the year to March 2007 if oil prices continue at or rise further from current levels.

The central bank also warned of inflation pressures in rising asset prices, such as property as bank lending soars and fuels a boom. Bank credit grew 32 per cent in the past year, the fastest rate in three decades. India’s economy is expected to have grown 8.1 per cent in the fiscal year just ended in March. The central bank said Tuesday it expects the economy to grow 7.5-8.0 per cent in the current fiscal year on the back of higher farm output after a good monsoon season. “Domestic macro-economic and financial conditions support prospects for sustained growth momentum along with stability,” Reddy said.