The Reserve Bank of India has kept the repo rate steady at eight percent during the third bi-monthly policy review on Tuesday. Irregular monsoon has been the main concern that would lead to inflation 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," Reuters quoted a statement from RBI.
The bank has also decided to keep inflation target at eight percent by 2015 and six percent by January 2016. It has also decided to trim the SLR by 50 bps to 22 percent that will be effective from 9 August. (One BPS is one hundredth of a percent point)
"The next reading on inflation could be significantly higher than the previous reading. However the RBI may take some comfort from core CPI inflation easing and the incipient recovery in industrial production," the news agency quoted A. Prasanna, economist at ICICI Securities Primary Dealership in Mumbai.
Most analysts opined that the worst is over for the economy, as lately the Consumer Price Index (CPI) eased to a 29-month low of 7.31 percent and May's Index of Industrial Production touched to 19 months high of 4.7 percent.
RBI repeated its commitment to help the slowing economy with support of Modi-led government through supply of funds in money market or by lowering lenders bond holdings. In June, the central bank trimmed the statutory liquidity ratio (SLR) by a half a percentage point.
RBI Governor Raghuram Rajan met Finance Minister Arun Jaitley in May, after which he announced that fighting inflation will continue to be the priority of the Central bank and the government.
Recent surge in prices of onions and other vegetables across the country due to irregular rainfall added to the government's woes. Vegetable prices rose 9 percent and fruit prices surged around 21 percent year on year in June.
But, IIP and manufacturing activity reports have raised hopes that the economy could move above sub-five percent to trim fiscal deficit to 4.1 percent of GDP.
Provisional annual inflation rate based on all India CPI for the month of May was recorded at 9.83 percent, according to the Ministry of Statistics. The inflation rate from January 2012 to March 2014 was in range of 7.65 percent to 11.6 percent. The rate in 2012 was 9.69 percent, but it surged to the level of 10.7 percent in 2013.