This is the fourth consecutive time that the RBI has kept key interest rates unchanged despite clamours from the industry to cut rates to boost economy.
The short-term lending rate (repo) rate now stands at 8 per cent, and the cash reserve requirement of banks at 4 per cent. The statutory liquidity ratio (SLR) has also been retained at 22 per cent.
Explaining the rationale for status quo policy, Rajan said though WPI inflation has ebbed to levels consistent with 8 per cent inflation by January 2015, "there are risks from food price shocks as the full effects of the monsoon's passage unfold, and from geo-political developments that could materialise rapidly."
Read full statement: RBI Monetary Policy
He said that there are "uncertainties" over food inflation even though 6 per cent retail inflation target by January 2016 remains a possibility.
"The future policy stance will be influenced by the RBI's projections of inflation relative to the medium term objective of 6 percent by January 2016, while being contingent on incoming data," Rajan said.
The RBI also retained the growth projection for the current fiscal at 5.5 per cent. The apex bank sees FY16 growth at 6.3 per cent.
Stock markets remained flat with BSE Sensex at 26,626 points.
The WPI inflation dipped to a 5-year low of 3.74 per cent in August, while the retail inflation stood at 7.8 per cent.
Rajan said, "the balance of risks is still to the upside, though somewhat lower than in the last policy statement. This continues to warrant policy preparedness to contain pressures if the risks materialise".
He said the fall in crude prices and relative stability in the foreign exchange contains some of the upside risks to inflation.
On growth, Rajan said second and third quarter growth will lower than the first quarter, but the fourth quarter looks more promising.
The Governor also said the final guidelines on small banks and payments banks will be issued by end-November, while the final norms with regard to the changes in the regulatory framework for NBFCs will be introduced by end-October.
Rajan reduced the liquidity provided under the export credit refinance (ECR) facility from 32 per cent of eligible export credit outstanding to 15 per cent with effect from October 10.
RBI, however, continued to provide liquidity under overnight repo at 0.25 per cent at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent through auctions.
* RBI Governor Raghuram Rajan keeps interest rate unchanged at 8 per cent.
* RBI retains growth projection for current fiscal at 5.5 per cent.
* Future policy stance will be influenced by inflation outlook: RBI.
* Number of disinflationary forces like low oil prices, in play: RBI Governor.
* RBI says sharp pick-up in GDP growth during Q1 may not be sustained in Q2 and Q3.
* Can reach inflation target of 6 per cent by January 2016: RBI Governor.
* We welcome Jan Dhan Yojana; I am not worried about the quality of KYC, concerned about achieving proper financial inclusion: RBI Governor
RBI keeps interest rates unchanged, warns on inflation
(Reuters) The Reserve Bank of India sent a strong signal on Tuesday that it will refrain from cutting interest rates until it is confident that consumer inflation can be reduced to a target of 6 percent by January 2016.
The Reserve Bank of India policy review statement reinforced Governor Raghuram Rajan's commitment to tame inflation in a country that has long struggled with prices rising at double digit levels annually, causing most distress for the country's poor.
The RBI kept its key policy repo rate unchanged at 8.0 percent, as widely expected, and also left its main liquidity levers - the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) - untouched.
Warning of upside risks to its 2016 inflation target, the RBI said policy moves would hinge on inflation trends.
"This continues to warrant policy preparedness to contain pressures if the risks materialise," the RBI statement said. "Therefore, the future policy stance will be influenced by the Reserve Bank's projections of inflation relative to the medium term objective (6 per cent by January 2016), while being contingent on incoming data."
Consumer price inflation slowed to 7.8 percent in August, making the RBI far more confident that the near-term target of 8 percent inflation in January would be met.
In a separate report on inflation, the RBI spelled out its concerns for the future, noting elevated inflation expectations among households and an enduring risk of higher food prices because structural issues were taking time to solve.
The central bank projected inflation to ease to 6 percent by November but soon rise to around 8 percent by January through March 2015 as a favourable base effect is likely to reverse.
A Reuters poll last week showed most analysts expect the RBI will not cut interest rates until the April-June quarter.
"The key takeaway is that the central bank is now focused on achieving the 6 percent inflation target rather than the 8 percent target," said Soumyajit Niyogi, an analyst for SBI DFHI Primary Dealership.
ECONOMY TO GROW FASTER
Investors in India's bonds are happy with the priority Rajan gave to breaking the "back of inflation" in a speech last week. And, on Tuesday, the benchmark 10-year paper was down 1 basis point to 8.48 percent from its previous close.
Filled with hope by the election of Prime Minister Narendra Modi last May, investors in India's booming stock market have been undeterred by the high interest rates.
The new Modi government has backed Rajan, though the central bank's strategy is far less popular with businesses, which want relief from high interest rates, and banks which want to lend more.
The RBI on Tuesday reiterated its economic growth projection at 5.5 percent for 2014/15 and said it expects the economy to grow 6.3 percent in 2015/16.
Modi's reformist government will want more priority to be given to boosting economic growth, but it will have to play its part by remedying structural issues that create supply bottlenecks, and by reducing its fiscal deficit.
In the absence of rate cuts, all the RBI has offered so far this year to help growth has been modest measures to make more credit available.
Ultimately, India needs far stronger investment if it is to decisively recover from the sub-five percent growth suffered in the past two years, and grow fast enough to provide jobs for the millions of young people entering the labour market.