Though the Reserve Bank of India is expected to cut interest rates next week by a quarter percent to a four-year low, officials say concerns over prices make it likely to resist political pressure for significant easing in the coming months.
In growing contrast with the government, which is desperate to accelerate a sluggish recovery, an increasingly independent RBI under governor Raghuram Rajan remains focused on a long-term inflation target of 4 percent and ending decades of damaging price volatility.
“The inflation outlook is still uncertain, and that is why the governor wants to be cautious,” said one official familiar with the RBI’s thinking.
“It makes sense to wait and watch how sustainable the fall in inflation will be.”
Headline inflation has dipped due to lower commodity prices, but the officials said the RBI was concerned that any spike in food prices due to weak monsoon rains or in crude oil would push up prices and expectations of future rises – at least until India can resolve significant supply and transport bottlenecks.
Worries about the impact from rate hikes expected in the United States later this year add to the caution, the officials said, given the potential for destabilising outflows by foreign investors and volatility in the rupee.