Belying the government and India Inc's hopes, the RBI, in its second bi-monthly monetary policy review of 2017-18, on Wednesday kept its key lending rate unchanged at 6.25 per cent, while Governor Urjit Patel disclosed that the Monetary Policy Committee had turned down the Finance Ministry's invite for a discussion ahead of its meeting.
Meanwhile, industry described the decision as along expected lines and hoped the latest fall in inflation would lead the central bank to ease rates in the near future.
However, to induce liquidity into the system, the Reserve Bank of India (RBI) reduced by 50 basis points to 20 per cent the Statutory Liquidity Ratio (SLR) - a reserve requirement that commercial banks must maintain. It kept at 4 per cent the cash reserve ratio (CRR), or the quantum of liquid funds the commercial banks have to keep.
Announcing status quo on the key interest rate, Patel said the abrupt fall in inflation in April "from the firming trajectory that was developing in February and March has raised several issues that have to be factored into the inflation projections.
"Risks are evenly balanced, although the spatial and temporal distribution of the monsoon and the government staying the course in effective food management will play a critical role in the evolution of risks."
This is the fourth consecutive policy review in which the apex bank kept its repo, or short-term lending rate, unchanged since reducing it by 25 basis points to 6.25 per cent in October 2016.
Consequently, the reverse repo rate, under the liquidity adjustment facility, remains at 6 per cent, and the marginal standing facility rate and the bank rate at 6.5 per cent.
The decision to maintain the repo rate was taken by the six-member MPC headed by Patel, which voted five-to-one in favour of holding the rate - the first time when it did not take a unanimous decision since beginning work in October last year. Its six members are equally divided amongst government nominees and the RBI.
At its last policy review in April, the RBI had kept the key lending rate unchanged but narrowed its policy corridor and hiked reverse repo rate to six per cent. In a press briefing after announcing the rates, Patel disclosed that the committee had turned down the Finance Ministry's invite for a discussion ahead of its policy review meeting.
Asked if this represented an assault on the RBI's autonomy, he only said the MPC did not accept the invite. The RBI also raised concern on the farm loan waivers saying that such actions increase the risk of slippages and contribute to inflation sooner or later.
Patel said that states should avoid going down the "slippery path" as such measures can erode fiscal gains made over the previous 2-3 years.
Asked if the effect of demonetisation was evident in the 2016-17 GDP growth of 7.1 per cent, Patel said that the data needs to be analysed first before reaching such strong conclusions.
Delinking the slowdown in GDP growth demonetisation, he said that the deceleration was visible from the fiscal's very first quarter and the slowdown in GDP was majorly because of deceleration in capital formation.
On remonetisation, RBI Deputy Governor B.P. Kanungo said that there was no shortage of cash as 82.6 per cent of economy had been remonetised.
In the first official reaction to the RBI decision, Chief Economic Advisor Arvind Subramanian felt the central bank had overstated the risks on inflation, noting the inflation outlook has been benign, while growth in the economy has decelerated along with slowdown in private investment, credit growth and gross capital formation.
"Seldom have economic conditions and outlook pointed so strongly towards monetary policy easing," he said.
Welcoming the SLR reduction, industry chamber Ficci's President Pankaj Patel said that a lending rates cut was much needed, given that domestic private investments have been persistently weak.
"Also, the GDP numbers released last week clearly reflect the effect of demonetisation panning out in the fourth quarter of last fiscal. At this juncture, the central bank signalling a move towards an accommodating stance would have helped uplift the sentiment," he said.
Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, said that they "maintained expectation that the RBI will likely remain on a pause as it continues to watch out for the evolving inflationary conditions".
"We believe that a case for a rate cut will be strengthened only with a downside surprise to RBI's inflation estimates for the second half of 2017-18."