The Reserve Bank of India (RBI) left its benchmark interest rates unchanged at 8 percent on Tuesday, broadly in line with expectations, but warned of inflationary risks should a shortfall in monsoon rains trigger a run-up in food prices.
"With some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted," the RBI said in a statement.
The Reserve Bank of India (RBI) also lowered banks' minimum bond holding requirements, known as the statutory liquidity ratio (SLR), by half a percentage point to 22.0 percent, and cut the ceiling on debt that must be held-to-maturity by half a percentage point to 24 percent.
The rupee trimmed gains to trade at 60.88 against the dollar from 60.85 before the decision. The NSE index dipped 0.2 percent having traded flat before.
"Indian inflation has recently subsided, but on the other hand a weak monsoon is threatening a revival of price pressures and growth indicators have improved," said Dariusz Kowalczyk, strategist at Credit Agricole.
RBI Governor Raghuram Rajan has raised rates three times since taking charge last September in an effort to curb inflationary pressures.
— Reuters contributed to this report.