The Reserve Bank of India (RBI) on Tuesday sounded a caution saying downside risks to growth could accentuate if electoral outcomes fail to provide a stable government in the country, a week ahead of the crucial Lok Sabha elections.
RBI governor Raghuram Rajan unveiled the central bank's monetary policy and left its policy interest rate unchanged, as expected, and said it does not expect further near-term policy tightening if headline inflation continues to ease towards the bank's targeted level.
If the country gets a stable government it could mean better fiscal management and accelerated economic reforms and an unstable and fragmented coalition could trigger inflationary populist spending that may prompt the RBI to raise rates.
The RBI kept its key repo rate at 8%, in line with the forecast of all 53 economists in a Reuters poll last week. Since taking office in September, Rajan has raised the repo rate three times by a total of 75 basis points.
India's consumer price index inflation eased to 8.10% in February, near the RBI's January 2015 target of 8%, while the wholesale price index slowed to a 9-month low of 4.68%. The RBI wants CPI inflation to ease further to 6% by January 2016.
"If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture," Rajan said in his policy statement.