Following the Reserve Bank of India's (RBI) decision to leave benchmark interest rates unchanged, economists says the central bank is likely to resist the pressure to ease for the remainder of the year to ward off a potential rebound in inflationary pressures.
The central bank held the key policy repo rate steady at 8 percent on Tuesday, in line with expectations, but warned of inflationary risks should a shortfall in monsoon rains trigger a run-up in food prices.
"The RBI…remains aptly concerned about upside risks to inflation and, consistent with this, reiterated its commitment to ensure sustained disinflation," Frederic Neumann, co-head of Asian economic research at HSBC wrote in a note following the decision.
In a statement accompanying the monetary policy review, the central bank said there are upside risks to its consumer price index (CPI) inflation target of 6 percent by January 2016, warranting a "heightened state of policy preparedness."
The central bank will likely wait till the end of the year, once the monsoon season has passed, to get a clearer picture on price pressures before making a decision to lower rates, said Neumman.
"We believe that the speed and nature of the recovery will determine rate cuts. A sharp recovery supported by a boost in consumption demand would stoke inflation given the sluggish supply response in the economy arising from structural constraints," he said.