Citing upside risks to inflation from price pressures as the main reason for keeping its key interest rate unchanged earlier this month, the RBI's monetary policy committee (MPC) said there is room for banks to further cut interest rates, minutes of the MPC meeting on April 5-6, released on Thursday, showed.
At its first bi-monthly policy review of the 2017-18 fiscal, the RBI preferred to maintain status quo on its repurchase (repo) rate, or the short-term lending rate it charges on borrowings by commercial banks, saying it awaited further macroeconomic data before deciding on any changes.
"After moderating continuously over the last six months to a historic low, retail inflation measured by year-on-year changes in the consumer price index (CPI) turned up in February to 3.7 per cent," according to the minutes of the MPC meeting.
"While food prices bottomed out at the preceding month's level, base effects pushed up inflation in this category. Importantly, inflation excluding food and fuel has exhibited persistence and has been significantly above headline inflation since September 2016," it said.
Although committe member and RBI Executive Director Michael Patra favoured an increase in the repo rate by 25 basis points as a pre-emptive move to check inflationary pressures, at the end the six-member MPC unanimously decided to maintain status quo.
In the monetary policy statement, the RBI said risks are evenly balanced around the inflation trajectory at the current juncture. "There are upside risks to the baseline projection," it said.
"Inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored. At the same time, the output gap is gradually closing. Consequently, aggregate demand pressures could build up, with implications for the inflation trajectory," it added.
RBI Governor Urjit Patel told the MPC that "the outlook for inflation calls for close vigilance" and there is room for banks to further cut interest rates.
"There is still room for banks to cut lending rates. For efficient transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system," Patel said.