The Reserve Bank of India will have room to cut interest rates when inflation comes down but whether or not the RBI actually cuts the rate is a bit too premature to say, Governor Raghuram Rajan said on Tuesday after hiking rates in a surprise move.
Rajan also said that it was necessary to make the statutory liquidity ratio (SLR) a liquidity function rather than a funding function, but added that he does not see the need to cut the SLR immediately.
Earlier in the day, the RBI unexpectedly raised its policy interest rate by 25 basis points but said that if consumer price inflation eases as projected it does not foresee further near-term tightening.
The policy decision was driven by an expectation that consumer price index (CPI) inflation will remain high, an indication that the RBI is looking to adopt a recent proposal to base its policy rate decisions on a CPI target.
The RBI raised its policy repo rate by 25 basis points to 8.00 percent.
Most economists in a Reuters poll conducted last week had expected no change in rates. However, expectations for a rate hike had increased after a central bank panel proposed to make CPI the main inflation benchmark.
Indian bonds, stocks and the rupee fell after the rate hike but soon recovered most losses on the back of the dovish statement. The benchmark 10-year bond yield which rose as much as 9 basis points following the hike, retreated entirely to continue trading down 5 bps on the day at 8.72 percent.