MUMBAI: While Rajan signalled positive trends in inflation, analysts cautioned that the prospect of slashing rates was reduced, given the new inflation targets and a statement that contained words of warning as well as encouragement.
"I feel another 25 bps is possible, maybe in the April policy but after that there will be a pause," said Rupa Rege Nitsure, group chief economist at L&T Financial Services.
Indian inflation has moderated sharply as oil prices slumped since last year. In January, consumer prices INCPIY=ECI rose an annual 5.11 percent, having fallen from double digity levels as recently as November 2013.
That was well within the inflation target of 4 percent, with a band of plus or minus 2 percentage points, agreed by the RBI and the government, which will be set starting from the financial year ending in March 2017.
Rajan said in the statement the RBI would seek to bring the inflation rate to 4 percent, the midpoint of that band by the end of the two-year period starting in 2016/17.
The statement also noted that the rupee's relative strength added to disinflationary pressures, although Rajan said the RBI does not target exchange rates or have a target for currency reserves.
Rajan also cast doubt on the government's revision to its data methodology last month that resulted in the economy showing growth of 7.5 percent year-on-year during the last quarter, higher than China, when previously India's economy was regarded as struggling to get out of a rut.
"The picture it presents of a robust economy, with growth having picked up significantly over the last three years, is at odds with still-low direct measures of growth of production, credit, imports and capacity utilisation as well as with anecdotal evidence on the state of the economic cycle," Rajan said.
"Nevertheless, the picture of a steadily recovering economy appears right."
The RBI had first lowered interest rates this year on Jan. 15, in a similarly unexpected move. Both rate cuts took place outside of the central bank's scheduled policy review meetings.