India's central bank held its key lending rate at a record low today, saying growth was a priority as it warned of risks from inflation and the new Omicron variant on the economic recovery.

But even as the Reserve Bank of India retained its accommodative policy stance, it outlined plans to drain surplus liquidity in the banking system.

This raises the chances of a hike in a key borrowing rate early next year.

The central bank's monetary policy committee held the lending or repo rate at 4%. The reverse repo, or borrowing rate, was also kept at 3.35%.

All 50 economists polled by Reuters had expected no change in the repo rate and did not expect a change before the second half of 2022.

"The overarching priority of RBI at this stage is revival of growth. Price stability is also our concern, so therefore at this moment, without losing sight on the requirement of price stability, we will concentrate on growth," Governor Shaktikanta Das told a news conference.

The MPC voted unanimously to maintain the status quo on the repo rate and by a majority of 5-1 to retain the accommodative policy stance.

"Given the slack in the economy and the ongoing catching up of activity, especially of private consumption, which is still below its pre-pandemic levels, continued policy support is warranted for a durable and broad-based recovery," Das said earlier in a virtual address.

India's economy expanded 8.4% in the September quarter from a year earlier, the fastest pace among major economies, but economists say the pandemic situation is a wild card.

The MPC retained its full-year economic growth projection at 9.5% and also kept its retail inflation outlook unchanged at 5.3%.

Indian inflation could trend higher, its central bank has warned

Inflation has been within the RBI's 2-6% target range in recent months but Das said inflation could trend higher in the immediate future and sustained high core inflation was a matter of policy concern.

However, with the recent cuts in fuel taxes, RBI expects core inflation to start trending lower over the medium term.

The RBI has slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the coronavirus pandemic and strict containment measures.

As expected, the central bank enhanced the quantum of its variable rate reverse repo (VRRR) auctions, to continue to re-balance the liquidity surplus in the banking system but it refrained from giving any signal of a permanent withdrawal of liquidity.

"RBI will continue to rebalance liquidity conditions in a non-disruptive manner while maintaining adequate liquidity to meet the needs of the productive sectors of the economy," Das said.

Das said the Indian economy was relatively well-positioned on the path to recovery, but it cannot be immune to global spillovers or to possible surges of infections from new mutations including the Omicron variant.