The Reserve Bank of India (RBI) is likely to hold its policy interest rate for a long time now, with concerns over high inflation pressures adding to risks to broader macroeconomic stability amid slowing growth, Capital Economics India Economist Aninda Mitra said Wednesday.

Capital economics expects India's headline inflation to be 6.2 percent through the coming fiscal year, while the RBI forecasts that inflation will remain range-bound around its existing level of 6.8 percent.

The economist noted that if the inflation projection proves correct, India's bank deposit rates will remain negative in real terms.

In India there is an additional concern that negative real interest rates are driving household demand for gold, leading to constraints in the banks' ability to lend amid weakness in deposit growth. Also, the current account deficit is widening further as gold purchases have become a significant factor in the deterioration current account, the economist said.

The central bank reduced its repo rate to 7.5 percent from 7.75 percent at the latest meeting. The bank, meanwhile, left the cash reserve ratio unchanged at 4 percent after cutting it by 25 basis points at the previous meeting.

According to the economist, the latest rate-cut follows on the heels of data showing lower core inflation, weaker GDP growth, slower government spending, and sharply weaker auto sales last month.

RTTNews