Mumbai: Reserve Bank Governor Raghuram Rajan Tuesday left borrowing costs unchanged but signalled a prospect of interest rate cut later this year if strong monsoon rains dampen inflation.
He also emphasised that the need for more monetary transmission - passing on the rate cut benefits to borrowers - to support growth revival continues to be critical.
In his penultimate bi-monthly monetary policy before his three year term comes to an end on September 3, Rajan said the recent stronger-than-expected inflationary pressures from food and commodity prices brought "considerable uncertainty".
But strong monsoon rainfall and astute food management to increase supplies could offset those risks, he said.
"Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative," he said, adding that RBI will monitor macroeconomic and financial developments for any further scope for policy actions.
Accordingly, Rajan retained the short-term lending rate at 6.5 and the cash reserve requirement of banks at 4 per cent.
Commenting on policy, Economic Affairs Secretary Shaktikanta Das said the policy unveiled is broadly in line with government's expectations on growth and inflation.
RBI pegged economic growth at 7.6 per cent and retail inflation target at 5 per cent for January 2017.
Explaining the rationale for keeping the rates unchanged, Rajan said: "Incoming data since the April policy announcement show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices."
Retail inflation soared to 5.39 per cent in April on higher food prices, reversing a downward trend seen in recent months.
Besides rising inflation, the crude oil price is also looking up and has touched USD 50 a barrel, from a low of about USD 30, and could increase inflationary pressures.
Rajan said there are upside risks to the price index trajectory such as firming international commodity prices, particularly crude oil and the 7th pay commission awards which will have to be factored into projections as soon as clarity on implementation emerges. .