The repo rate, at which RBI lends to banks, remained at 6%.
In the medium term, RBI has a positive outlook for the country as it believes that "capital raised from the primary capital market has increased significantly after several years of sluggish activity". "However, higher growth overseas also carries the risks of upward movements in commodity prices, not really good news for a major oil importer like India". The RBI said the MPC remains committed to keeping headline inflation close to 4 percent on a durable basis.
Inflationary pressures could build up from a variety of factors - a possible slide in the fiscal position, rising crude oil prices or disturbances in the global financial markets when the Federal Reserve unwinds easy liquidity, as credit growth begins to gain momentum in the domestic market. RBI reiterated its commitment to keep inflation within 4 per cent plus or minus 200 bps.
The main equity index was down 0.4 percent after the decision. The marginal standing facility (MSF) and the bank rate are steady at 6.25 per cent. Higher interest rates had helped the currency offer some of Asia's best returns this year to investors who borrowed in dollars.
Data released in November showed that India's annual rate of inflation based on wholesale prices (wholesale price index) rose to 3.59 per cent in October due to an exponential rise in food prices. "Coal mining, which revived strongly in Q2, slowed down too, while cement production contracted", said the RBI. The central bank's tendency to overestimate inflation has cost the economy, according to Ashima Goyal, a member of the Prime Minister's Economic Advisory Council. In the last policy, RBI had revised the fiscal year 2017-18 growth target down to 6.7% from 7.3%, citing adverse shocks, especially to the manufacturing sector, from the implementation of the goods and services tax (GST). GVA increased 6.1 percent.
In sum, while maintaining the overall neutral stance, the tad bullishness on growth and hawkishness on inflation clearly points to an end of the rate cut cycle. "We did not consider shifting the stance because nothing between October to now was significant enough in the macro outcomes to warrant that".
The central bank is also likely to be concerned that the government may have a wider fiscal deficit in the fiscal year ending in March than the 3.2 percent target, raising the prospect New Delhi may have to sell more bonds.
Global economies gain momentumThe RBI said the global economic powerhouses like the United States, and the Euro zone, and Japan also gained momentum in the past quarter, with uptick momentum in private consumption, investment activity and net exports. "Only once fiscal policy improves investments in the economy, can monetary policy changes by the RBI help".