MUMBAI: India's central bank governor Duvvuri Subbarao on Wednesday said another surge in inflation could mean an increase in interest rates but added that the probability of hiking rates was "small".
Subbarao's statement came a day after India's central bank lowered interest rates for the first time in three years, announcing a bigger-than-forecast cut of 50 basis points and warning that further easing could be difficult.
"The probability of hiking rates is not zero but it is small, just as the probability of easing interest rates further is also not zero but modest," Subbarao said in a conference call with analysts.
Business leaders have been clamouring for interest rates to be reduced to boost the economy, expected by the government to grow by 6.9 percent in the financial year just ended, its slowest pace since the 2008 financial crisis.
The central bank on Tuesday reduced the benchmark repo rate, at which it lends to commercial banks, to 8.0 percent and the reverse repo rate, which it pays banks for deposits, to 7.0 percent.
India's economy has been staggering under the brunt of 13 rate hikes between March 2010 and October 2011 by the central bank which was seeking to control stubbornly high inflation. A weakening global economy has also hurt exports.
Explaining the rationale for the sharper-than-expected half-percentage-point cut, Subbarao said "growth and inflation dynamics permitted a reduction of that magnitude".
Subbarao said on Tuesday the outlook for inflation remained "challenging" amid rising crude oil prices and growing geo-political tensions, limiting "the space for further reduction in policy rates".
Inflation is running at 6.89 percent, down from the near double-digit level it was riding at for most of 2012. The central bank says it expects inflation to fall to around 6.5 percent by March 2013.
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