India's central bank cut its main interest rate by a quarter of a percentage point yesterday in the third such move this year, but said there was "little space" for further reductions to help the slowing economy.
After meeting in Mumbai, the Reserve Bank of India said that the benchmark repo rate, at which it lends to commercial banks, would fall to 7.25 per cent, as expected by most economists.
The cash reserve ratio - the percentage of deposits banks must keep with the central bank - was kept unchanged.
Explaining the rate cut, RBI governor Duvvuri Subbarao said "growth had decelerated continuously", forecasting expansion of 5.7 per cent in the new fiscal year - far below the government's estimate of 6 per cent to 6.5 per cent. But he warned there were significant risks to inflation in the near term and said "monetary policy cannot afford to lower its guard against the possibility of a resurgence of inflation pressures".
India's headline inflation eased to a three-year-low of 5.96 per cent in March, but the consumer price index is high at 10.39 per cent, led mainly by high food prices.
The governor also struck a cautious tone about future rate cuts. "Overall, the balance of risks stemming from our assessment of the growth-inflation dynamics yields little space for further monetary easing," Subbarao said.
The RBI's decision to cut rates had been forecast by economists and business leaders, who have been calling for lower borrowing costs to help the economy, which grew at an estimated 5 per cent in the full year to March.
"[Yesterday's] action was expected. The tone from the bank governor was cautious, which was also expected," said Siddhartha Sanyal, the chief India economist with Barclays Capital.
Economist Shubhadao Rao, of Yes Bank, said the RBI's tone was hawkish. She expects one more rate cut after yesterday's action, as the macroeconomic conditions in terms of growth and inflation will improve in coming months.
The World Bank on Tuesday lowered its forecast for growth to 6.1 per cent for the new fiscal year from the 7 per cent projected six months ago.
Subbarao said that the biggest risk to India's economy came from the current account deficit, which widened to a record 6.7 per cent of gross domestic product in the December quarter.