The Reserve Bank of India (RBI) on Wednesday kept its key lending rate-the repo rate-unchanged at 6%, dashing hopes of lower borrowing costs for households and the companies ahead of the festival season.
The bank reduced the statutory liquidity ratio by 50 basis points to 19.50 percent.
All but three of the 60 analysts polled by Reuters had expected RBI to keep the repo rate steady.
Experts say it is likely to spur economic growth in the long run but has posed an initial shock to the economy as businesses adjust. The MPC has also reiterated the need to support investment activity and the gamut of measures that are being undertaken by government will help this process significantly.
However, the telltale signs of weakness in the macro-economic indicators tied the hands of the MPC to maintain status quo on policy rates, even though inflation seems to be pretty under control. Further policy action will be contingent on the evolution of the output gap and its impact on the inflation trajectory.
When specifically asked whether rising inflation meant that the possibility of an interest rate cut in coming cycles had come to an end, Patel said: "The MPC is watching all the available data very closely".
"I think government and the central bank is in sync".
The policy was more or less along expected lines. The rates like cash rate, repo rate, reverse repo rate, etc., while managing money supply and controlling inflation, also hold a key to interest rates on retail loans like home loan, auto and vehicle loans.
All the major global rating agencies have placed the country rating at 'BBB-', which is just one notch above the junk grade, although with a stable outlook. Besides liquidity with the banks, the lending rates on retail loans are also a function of the cost of funds of the banks. This can be used for LCR purposes. "Such juxtaposition of risks to inflation needs to be carefully managed", the apex bank noted.
The RBI, in August, had pegged growth at 7.3 per cent for 2017-18 on a GVA basis.
The government sees the decline in growth as a hiccup and expects the economy to pick up pace in the second half of the year as teething troubles with GST get resolved and the effect of demonetisation wanes.
"We believe that RBI will stay on status quo for the rest of the year". I expect domestic disinflationary impulses like subdued capacity utilization, proactive food price management, and rationalization of fuel tax rates to have an offsetting effect.
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