The Reserve Bank of India (RBI) may further lower the interest rate if inflation continues to ease and if the monsoon is favourable, Governor Raghuram Rajan has said.
"We are looking at inflation. If it continues on a downward path, that would create room (for further rate cuts)," he said.
Earlier this month, RBI reduced its policy rate by 0.25 per cent to 6.5 per cent -- its lowest level in more than five years. While this was the first rate cut after a gap of six months, RBI has lowered its rate by 1.5 per cent cumulatively since January 2015.
Still, the industry wants further rate cuts from RBI to boost investment. During the same time period, the banks have lowered their own lending rate by 0.25-0.5 per cent.
Rajan, who is currently attending the spring meetings of the International Monetary Fund and the World Bank, further said RBI is also looking at how the monsoon progresses this year after two consecutive bad years.
"We are looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoons though people find it hard to see a link between monsoons and food prices. But there is potentially (a link), with this being the third bad monsoon in a row (if) that happens," Rajan told business daily The Wall Street Journal in an interview.
He further said India has got it "right" when it comes to managing the macro-economic scenario even as several other economies, including emerging ones, were struggling amid overall tough global conditions.
Rajan said India has narrowed its deficits to ensure greater flexibility to manage its economy through the turbulent global scenario.
He also praised US Federal Reserve Chief Janet Yellen for paying more attention to emerging markets in her policy for the US markets. "They certainly are paying more attention and talking about paying more attention, which I think is a very welcome step... I think that's changed quite a bit under Yellen," he said.
The US Fed policies have been criticised in the past by policymakers from emerging markets for the adverse impact their quantitative easing moves have had on emerging markets, including on India and China.
Rajan said the current shift in the Fed policy allows the emerging markets more room to address issues like currency volatility and declining commodity prices.
Referring to the Fed move to slow the pace of their rate hikes, Rajan said it has helped take a little bit of pressure off on others. "Are other countries capable of using the time well, or are the problems beyond their actions?" he wondered.