"The Reserve Bank remains committed to keeping the economy on a disinflationary course, taking CPI inflation to 8 percent by January 2015 and 6 percent by January 2016," Rajan said in the second bi-monthly Monetary Policy Statement.

He said the lowering of interest rates will depend on easing of inflationary pressure.

"If the economy stays on this course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance," Rajan said.

Retail inflation as measured by the consumer price index accelerated to a three-month high of 8.59 percent in April, pushed up by a sharp spike in food inflation.

CPI inflation excluding food and fuel has moderated gradually since September 2013, although it is still elevated, Rajan said.

"CPI headline inflation has risen on the back of a sharp increase in food prices. Some of this price pressure will continue into May, but it is largely seasonal," he said.

Rajan said the upside risks to the CPI inflation target of 8 percent by January 2015 lie in the form of a sub-normal or delayed monsoon on account of possible El Nino effects, geo-political tensions and their impact on fuel prices, and uncertainties surrounding the setting of administered prices.

At this stage, these risks appear to be balanced by the possibility of stronger government action on food supply and better fiscal consolidation as well as the pass through of recent exchange rate appreciation, he said.

The RBI kept the key interest rate unchanged at 8 percent. It also cut the amount of deposits banks need to park in government securities by 0.5 percent to 22.5 percent to improve availability of funds.

(Agencies)

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