The Reserve Bank of India decided to retain its key benchmark rates unchanged as it waits for the government to announce its federal budget later this month.
However, the central bank lowered its statutory liquidity ratio to create space for banks to expand credit.
After resorting to a surprise rate cut three weeks ago, the central bank today retained its key repo rate at 7.75 percent and its reverse repo rate at 6.75 percent at its sixth bi-monthly monetary policy review on Tuesday.
The RBI lowered its key rates by a quarter basis point in an unscheduled review last month. The repo rate is the rate at which the central bank lends to commercial banks and the reverse repo rate is the rate at which the central bank accepts deposits from banks.
RBI Chief Raghuram Rajan said, "Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance."
Rajan said further action would depend on action on the fiscal consolidation and disinflationary process.
Shilan Shah, an India economist at Capital Economics, said this is only a temporary pause. Further rate cuts are likely, possibly as soon as the next meeting in April.
The cash reserve ratio was maintained at 4 percent. The Statutory Liquidity Ratio, the proportion of deposits that banks should invest in bonds, was reduced by 50 basis points to 21.50 percent, with effect from February 7.
The RBI said banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth.
Further, the bank decided to replace the export credit refinance facility with the provision of system level liquidity with effect from February 7.
The bank expects inflation to be around the target level of 6 percent by next January. Rajan said the bank will keenly monitor the revisions to the consumer price index.
The growth estimate for 2014-15 was retained at 5.5 percent using the old GDP base. The central estimate for real GDP growth in 2015-16 is expected to rise to 6.5 percent, the bank said.
The government revised its GDP data last week, which showed an economic growth of 6.9 percent in 2013-14, up from the 4.7 percent growth estimated previously.
Revised GDP statistics released on January 30 along with advance estimates for 2014-15 expected on February 9 will need to be carefully analyzed and could result in revisions to the Reserve Bank's growth projections for 2015-16, the bank today said.
Finance Minister Arun Jaitley will present the 2015-16 on February 28. Rajan said the bank would watch the quality of fiscal consolidation.
For comments and feedback: editorial@rttnews.com