Reserve Bank of India Governor Raghuram Rajan kept the country's key policy repo rate unchanged at 8 percent on Tuesday, as widely expected, with consumer price inflation coming down this year after a series of tightening steps by the central bank.
While Raghuram Rajan kept key policy rate on hold on Tuesday, he has eased rules to spur bank lending in a move set to be welcomed by the new pro-business PM Narendra Modi government as it seeks to revive economic growth.
The Reserve Bank of India, which kept interest rates on hold at 8 percent as widely expected, also hinted it would not raise rates as long as inflationary pressures continued to ease.
The loosening in credit and the central bank's surprisingly dovish remarks on inflation will put the onus on the new government to stick to conservative fiscal spending and broader reforms to get Asia's third-largest economy back on track, economists said.
The decisions from the RBI were widely seen as pragmatic moves. Raghuram Rajan has placed fighting inflation at the top of his agenda, for which he will need the support of Narendra Modi, India's popular new prime minister.
In turn, investors are hopeful the new government will respond by narrowing the fiscal deficit and tackling the supply-side factors that drive up food inflation in India, thus easing the burden on the poor and restoring investors' confidence.
"If the economy stays on this course, further policy tightening will not be warranted," Raghuram Rajan said in the RBI statement, referring to the moderating inflation trend.
The central bank governor added that the Modi-led victory in elections last month could help "create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth."
The governor's dovish tone on inflation sparked a rally in bonds and raised expectations the central bank could even ease monetary policy as early as this year.
The benchmark 10-year bond yield was trading at 8.60 percent at 0930 GMT, down 13 basis points from the day's high after earlier hitting a more than four-month low. The yield had closed at 8.66 percent on Monday.
Rajan's increased comfort on consumer price inflation - which cooled in 2014 from the near 10 percent level in the two previous years - could allow him to take steps to improve growth after raising interest rates by a total of 75 basis points since September. Its last tightening move was