India Keeps Rates on Hold Despite Surging Inflation

India's central bank kept a key interest rate unchanged Wednesday, surprising financial markets which had expected a rise to battle surging inflation.

After meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would remain at 7.75 percent.

Most economists had predicted an increase after wholesale inflation unexpectedly surged to 7.52 percent in November, a 14-month high and well above the RBI's comfort zone of five percent.

Recently appointed RBI governor Raghuram Rajan said the rate decision was a close call.

But he said there was "reason to wait before determining the course of monetary policy" given indications that vegetable prices -- the main inflation driver -- may be dropping sharply.

But if inflation fails to weaken when the next data are published "the Reserve Bank will act," Rajan said after chairing his third monetary policy meeting.

The governor had raised rates in both September and October, saying he was determined to fight inflation.

Government and business leaders have been clamoring for a cut in rates to help spur the slowing economy.

India posted surprisingly strong growth of 4.8 percent in the second quarter ended September thanks to robust farm output.

But this was still far below the near double-digit growth enjoyed when the economy was booming.

Rajan last week said the bank was "very uncomfortable" with the inflation level but added that growth was "weaker than we would like".

He also kept the cash reserve ratio -- the percentage of deposits banks must keep with the central bank -- unchanged at 4.0 percent.

Shares on the Bombay Stock Exchange jumped 215.84 points or 1.05 percent to 20,827.98 points, cheered by the move to keep rates on hold.

Siddhartha Sanyal, chief India economist with Barclays Capital, welcomed the decision.

"A rate hike at this stage would have unduly penalized the industrial sector in which the momentum is already weak," he told Agence France Presse.

Finance Minister P. Chidambaram expects the economy to expand by five percent again this year, but some private economists see growth as low as four percent.

The scandal-scarred Congress government hopes for a revival in the economy before a general elections due in May after faring poorly in state polls.

Chidambaram last week said that taming inflation was the government's top priority, adding it was "common knowledge the government of the day will pay a high price for inflation".