RBI governor Raghuram Rajan
RBI governor Raghuram RajanReuters file

Reserve Bank of India (RBI) Governor Raghuram Rajan could look at reducing the five-year-low repo rate (also policy rate or interest rate) further if retail inflation eases in the coming months and monsoon turns out to be favourable, as forecast by the Indian Meteorological Department (IMD). 

"We're looking at inflation. If it continues on a downward path, that would create room," he told the Wall Street Journal in an interview on Friday.

He also sounded a word of caution on monsoon rains, which have been projected to be broadly above normal this year by the IMD.  

"We're looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoons, though people find it hard to see a link between monsoons and food prices. But there is potentially, with this being the third bad monsoon in a row that happens."

The RBI had cut repo rate by 25 basis points (bps) to 6.50 percent at its first bi-monthly monetary policy review on April 5.

The rate cut after a gap of six months was attributed to receding retail inflation, which was in the bank's comfort zone of around 5 percent. Retail inflation was 5.18 percent in February. Another factor that weighed in on Rajan's decision was the Modi government's commitment to fiscal discipline to contain fiscal deficit at 3.5 percent of India's GDP by March 2017.

Praises US Fed chief Janet Yellen

Rajan also appreciated the shift in the U.S. Federal Reserve's stance of recognising the importance of emerging markets. "They certainly are paying more attention and talking about paying more attention [to emerging markets], which I think is a very welcome step," I think that's changed quite a bit under Yellen," he told WSJ.