India's central bank on Monday retained its key interest rate as expected on inflation fears, while policymakers unexpectedly cut the cash reserve ratio by 25 basis points.

The Reserve Bank of India (RBI) left the repo rate unchanged at 8 percent and the reverse repo at 7 percent. The repo rate is the rate at which the central bank lends to banks and the reverse repo rate is the rate at which it accepts deposits from banks.

The previous change in the key rates was in April, when the rates were slashed by a 50 basis points.

The RBI reduced its cash reserve ratio to 4.50 percent from 4.75 percent. The bank earlier reduced the ratio in January and March this year. Today's reduction will inject INR 170 billion into the banking system.

The bank said headline WPI inflation remained sticky at around 7.5 percent throughout the current financial year so far.

The RBI observed that there will be pressures on headline inflation in the short-term from the recent upward revision in diesel prices and rationalization of subsidy for LPG. However, it will strengthen macroeconomic fundamentals over the medium-term.

"In the current situation, persistent inflationary pressures alongside risks emerging from twin deficits - current account deficit and fiscal deficit - constrain a stronger response of monetary policy to growth risks," the bank said in a statement.

"Accordingly, as this process evolves, the stance of monetary policy will be conditioned by careful and continuous monitoring of the evolving growth-inflation dynamic, management of liquidity conditions to ensure adequate flows of credit to productive sectors and appropriate responses to shocks emanating from external developments," it said.

RTTNews