The Monetary Policy Committee (MPC) on December 4 decided to keep interest rates unchanged, and maintained the policy stance at "accommodative", amid high inflation and some signs of economic recovery.
"Signs of recovery are far from being broad-based and are dependent on sustained policy support," Reserve Bank of India (RBI) Governor Shaktikanta Das said.
The MPC made a unanimous decision to keep the repo rate steady at 4 percent, and reverse repo rate also remains unchanged at 3.35 percent.
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Most analysts and economists had expected the central bank to maintain status quo in its latest policy announcement.
The MPC will maintain the accommodative stance "for as long as necessary," at least during the current fiscal year and going into 2021-22.
The MPC projects real Gross Domestic Product (GDP) to contract 7.5 percent in 2020-21, an upward revision from an earlier estimate of a contraction of 9.5 percent.
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"The recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum as unlocking spurs activity and employment, especially of labour displaced by COVID-19. These positive impulses are, however, clouded by a possible rise in infections in some parts of the country, prompting some local containment measure," The MPC said.
Consumer Price Index (CPI) inflation is forecast at 6.8 percent in Q3FY21, and 5.8 percent in Q4. The MPC said the outlook for inflation has become "adverse relative to expectations in the last two months."
"While cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels," the MPC said.
Das also said the central bank's "role as the debt manager and the banker to the government was tested to the hilt in 2020".