Why RBI's status quo was in the offing

The market was expecting at least a 25 bps rate cut on December 5 but the Reserve Bank of India’s decision to leave lending rates unchanged came as a surprise.

The market reacted sharply and the benchmark Sensex took a sharp plunge of 270 points from the day's high. The outcome of the monetary policy committee (MPC) meeting left many nonplussed, as the central bank pointed towards the rise in retail inflation in support of its decision.

"Our calculation showed that during Q4 the food inflation will remain high. Its moderation in the coming months is dependent on several factors. With regard to core inflation, it is expected to be in the current zone. It is expected the inflation will come down, but some uncertainty is also there," RBI Governor Shaktikanta Das said.

While leaving the repo rate unchanged in its December policy review, the RBI maintained an accommodative stance as it expects past monetary easing and measures taken by the government to feed into the real economy gradually.

"The decision is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth," the RBI said in a statement.

The GDP growth target for 2019-20 was revised downwards from 6.1 percent in the October policy to 5 percent. The CPI inflation projection was revised upwards to 5.1-4.7 percent for H2 FY20 and 4.0-3.8 percent for H1 FY21.

The MPC raised the consumer inflation target for October-March to 4.7-5.1 percent, above its previous target of 3.6 percent. The April-September CPI inflation target for next year has been raised 3.8-4 percent.

The central bank sees high food prices as a major driver of inflation.

Incipient price pressures seen in other items such as milk, pulses, and sugar, too, were likely to be sustained, with implications for the trajectory of food inflation, the MPC said in a statement.

G Chokkalingam, Founder of Equinomics Research & Advisory Pvt Ltd, said this was the wisest and most logical move by the RBI.

"It is not a surprise. It is the wisest thing to do. We are already on course to 10-year low benchmark rate and despite that there is no uptick in GDP or core sector growth. Benchmark interest rate is the most important monetary tool and if we exhaust this to the fullest extent, we will not be able to tackle the further slide in the economy," Chokkalingam said.

The overall trajectory has not changed and the stance still remains the same, Pankaj Pandey, Head of Research at ICICI Securities, said.

"Stance still remains the same because of the higher inflation. Overall trajectory has not changed, only the expectation of rate cut has not materialised," he said.

RBI's primary task is to manage the monetary environment of the economy. Growth, too, is a factor that the central bank focuses on, but it is the government that has to take measures to drive growth.

"The RBI has finally thrown the ball back in the government’s court to revive the economic engine which has further deteriorated since the last meet," said Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote.

Modi said the transmission of interest rates has not happened, which could be one of the reasons the RBI waited to cut rates and nudged the government and banks to make an effort on their end.