The Reserve Bank of India surprisingly kept interest rates steady Tuesday, but warned that the government will have to raise domestic oil prices nearer global levels and that rates could rise in response.
Analysts had widely expected the central bank to increase short-term rates by 25 basis points for a third consecutive quarter, given concerns that record oil prices and booming asset markets would stoke inflation.
Instead the central bank, in a quarterly review, kept key short-term rates at 5.5 percent and long-term bank rates unchanged at a three-decade low of 6.0 percent.
But RBI governor Y.V. Reddy warned that the steady rates may not last because the government cannot afford to continue subsiding domestic prices of kerosene and other fuels to keep prices well below global levels.
"There has to be a fuller pass-through of increasing crude oil prices. In the event, inflation could turn out to be higher than the current benign levels," Reddy told reporters.
Reddy said he was reluctant to tamper with India's fast growing economy and current low inflation until signals were clear.
"The basic message that we are trying to give is we are having good times now," Reddy told reporters. "To make sure that the good times continue in an uninterrupted fashion, we have to consider the possible risks, both global and domestic, and be prepared to take appropriate actions, some pre-emptive."
The central bank said other risks to inflation, such as rising house prices and fast credit growth remain a worry. Bank credit grew 32 percent in the past year, the fastest rate in three decades.
Inflation, as measured by the weekly wholesale price index, has fallen from around 5.0 percent to 3.96 percent in the week ended March 25 while the economy is forecast to grow 8.1 percent in the year ended March and as much as 8.0 percent this fiscal year.