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SINGAPORE: Gold prices rose to their highest in more than a month on Thursday after European leaders agreed on a plan to contain the region’s debt crisis, lifting sentiment in the financial markets, while a weaker dollar helped.

Euro zone leaders reached agreement on a comprehensive package of measures to tackle the bloc’s debt crisis after an EU summit that ran into the early hours of Thursday, spurring the euro to a seven-week high against the dollar.

Gold rose in tandem with other commodities and equities, with cash prices hitting a one-month high of $1,728.11 an ounce, before easing to $1,722.49 by 0320 GMT, on course for its fifth straight session of gains.

US gold futures, which also hit a one-month high of $1,729.7, traded nearly flat at $1,724.60. "The market is back to normal," said Dick Poon, manager of precious metals at Heraeus in Hong Kong, "The equity market has stabilised on hopes in Europe, and money is flowing back to precious metals."

Technical analysis suggested spot gold could face a strong resistance at $1,725 and may retrace to $1,701 during the day, said Reuters market analyst Wang Tao.

GOLD INTEREST SEEN SUPPORTED

But market participants cautioned that Europe’s problems might take a long time to be solved, even after the agreement at the summit, which would help support safe haven interest in gold in the medium to long term.

"Yes we’ve seen an agreement, but there will be a time lag between now and execution of the plan," said a Shanghai-based trader, adding that the lingering uncertainty over global growth will continue to support gold.

Investment interest has returned to the gold market in the past few days, as fears over the euro zone debt crisis eased with progress in the political wrangling among European leaders.

The SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, recorded an inflow of 16.645 tonnes over the past three sessions, according to the fund’s website. (www.exchangetradedgold.com)

Physical demand for gold as well as silver remained robust in Asia, thanks to strong investment demand as well as seasonal buying during the festival and wedding season in India, the world’s largest gold consumer.

Spot platinum rose to a one-month high of $1,601.25 before easing to $1,595.49. Spot palladium climbed 1.1 percent to $648.72.

 

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The Reserve Bank today chose to continue with its tight monetary stance and raised interest rates by 25 basis points-- 13th time since March, 2010-- to tame inflation, even as it lowered the growth target to 7.6 per cent for the current fiscal.

In a major policy decision, Reserve Bank Governor Duvvuri Subbarao also deregulated savings bank deposit rates with immediate effect.

"Changing the policy stance when inflation is still far above the tolerance level entails risks to the credibility of the Reserve Bank’s commitment to low and stable inflation," the policy document said, even as it admits that growth momentum has slowed down.

It said inflation will start cooling by December this year and is likely to come down to 7 per cent by March, 2012.

Today’s hike is the 13th since March, 2010. The series of rate hikes has cumulatively increased interest rates by 525 basis points.

The policy is expected "to continue to anchor medium term inflation expectations", while stimulating investment activity to support growth.

Borrowers, who are livid at repeated rate hikes, can heave a sigh of relief as the RBI hinted at a reversal of policy stance by saying the likelihood of a hike in December is "relatively low".

The Reserve Bank of India (RBI) has kept other key rate and ratio-- bank rate and cash reserve ratio (CRR)-- unchanged at 6 per cent each. It also retained the statutory liquidity ratio (SLR) at 24 per cent .

Factors like weakening global macroeconomic outlook and high domestic inflation will pull down the economic growth rate further, RBI said while lowering the GDP forecast for the current fiscal to 7.6 per cent from its earlier projection of 8 per cent.

The risks to the policy emanate from worsening global macro scenario, commodity prices and increase in government spending which could crowd out private investment, it said.

An important policy decision RBI announced today is the freeing of savings bank deposit rates with immediate effect, the last bastion of the regulated interest rate regime.

Earlier in May, RBI had raised the savings deposit rates to 4 per cent from 3.5 per cent.

Giving banks the freedom to fix the savings accounts interest rate, RBI said banks will have to offer uniform rate on deposits of up to Rs one lakh. On higher amounts, they can give differential rates to depositors.

It has also permitted commercial banks to open branches in tier II cities without prior approval of RBI.

The Reserve Bank has also proposed to notify banning prepayment penalty on floating rate home loans, as recommended by the Banking Ombudsman recently.

The policy document further said that RBI will issue the final guidelines on credit default swaps by November-end.

As banking system prepares to go on to the Basel-III framework requiring higher capital adequacy, the RBI said the draft guidelines for its implementation will be issued by December-end.

As regards the micro finance sector, RBI has given the go-ahead for creating a new category called NBFC-MFIs (NBFC-Micro finance Institutions).

 

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