The Reserve Bank of India (RBI) on Thursday went against majority expectations and kept repo rate unchanged at 5.15 per cent in its fifth bi-monthly policy review of the year.
A large number of economists exuded confidence that RBI six-member Monetary Policy Committee (MPC) would lower the key interest rate once again as growth in the second quarter reached a six-year low of 4.5 per cent.
However, the central bank already cut repo rate -- at which banks lend from the RBI -- five times since January without any improvement in growth. It seems that the central bank will now explore other options to revive growth.
All six members of the RBI's MPC voted against the cut but maintained an accommodative stance, allowing it to act whenever necessary.
In what seems to be another setback, the central bank also lowered its GDP growth forecast for the entire year to 5 per cent from 6.1 per cent.
In a statement released after the announcement, RBI said, "GDP growth for Q2 turned out to be significantly lower than projected. Various high-frequency indicators suggest that domestic and external demand conditions have remained weak. Based on the early results, the business expectations index of the Reserve Bank's industrial outlook survey indicates a marginal pickup in business sentiments in Q4."
RBI also added that overall sentiments are muted in several key sectors including manufacturing and construction. It expressed concern over contraction in the output of eight core industries as well.
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Citing a sudden spike in inflation, it sharply increased its inflation projection from 4.7 to 5.1 per cent after retail inflation jumped to a 16-month high of 4.62 per cent in October.
RBI's growth and inflation forecast could be a matter of concern as the situation could worsen further, as Finance Minister Nirmala Sitharaman had stated that slow economic growth has not bottomed out yet.