The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The Reserve Bank of India (RBI) on Thursday surprised the markets by exercising a “temporary pause” on its interest rate, as it waits to get more clarity on inflation and government measures in the upcoming Budget in February, before re-engaging with the Centre on the “national endeavour” of lifting growth.

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, voted unanimously to keep the policy repo rate unchanged at 5.15 per cent. The RBI, however, revised its outlook for growth and inflation. The central bank revised down its 2019-20 growth forecast to 5 per cent from 6.1 per cent in the October policy review. The inflation forecast for the second half of 2019-20 was revised up from 3.5-3.7 per cent to 5.1-4.7 per cent.

Gross domestic product (GDP) growth for the second quarter came in at 4.5 per cent, the lowest since March 2012-13, according to the official data released recently. But the RBI is not worried about the slowdown, Das said in the policy press conference.

“We are just waiting for greater clarity. The government has taken several measures and the RBI has also reduced its rates subsequently. Liquidity has been in surplus mode. We should also allow some more time for the rate cuts to play out to be reflected properly. Therefore, the MPC decided to take a temporary pause,” Das said responding to a media query.

“There is a case of looking through the current spike in headline inflation, which is mainly due to a rise in food inflation. Our calculations show that food inflation in Q4FY20 is supposed to remain very high,” he said, adding that prices would start easing from February.

The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The 10-year bond yields jumped about 15 basis points (bps) to close at 6.613 per cent on Thursday. Prices drop as yields rise.

“I cannot remember the last time there has been such a resounding surprise as far as the RBI decision is concerned. It defies the expectation of the market and also the body language of the central bank over the last six months or so when it seemed amenable towards out-of-the-box thinking and being very proactive in terms of supporting growth,” said Taimur Baig, chief economist of DBS Group.

Business Standard