With five of the six members of the Monetary Policy Committee (MPC) voting for no change, RBI at its bi-monthly policy review kept benchmark repurchase or repo rate at near seven-year low of 6 per cent.
Keeping its policy stance at 'neutral', the Reserve Bank of India (RBI) raised its inflation forecast to a range of 4.2 to 4.6 per cent during remainder of current fiscal as against 4 to 4.5 per cent previously stated.
However to spur the economy, it lowered the proportion of deposits banks need to invest in specified securities, such as government bonds, to 19.5 per cent from 20 per cent effective October 14, freeing over Rs 55,000 crore for banks to lend.
RBI had lowered the Statutory Liquidity Ratio (SLR) by the same amount in June.
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The implementation of Goods and Services Tax (GST) had an adverse impact on manufacturing and may delay investment revival, it said hoping that there will be simplification of the new indirect tax regime to the ease business process.
In its last review in August RBI had slashed the benchmark lending rate by 0.25 percentage points to 6 per cent, the lowest in 6 years.
Commenting on RBI's policy stance, Finance Ministry in a statement said, "We have noted that this decision has been made by the MPC in light of the underlying analysis which implies a downward revision of the real GVA growth forecast for 2017-18 from 7.3 per cent to 6.7 per cent, which leads to a widening of the output gap."
Inflation projections for the year as a whole remain below 4 per cent, he tweeted.
The central bank said it stays committed to keeping inflation close to 4 per cent and said it is "imperative to reinvigorate investment activity".
"Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil," RBI said.
"Given the inflation outlook, there did not seem much room for monetary policy adjustments," deputy governor in- charge of the monetary policy function, Viral Acharya, told reporters at the customary post-policy interaction.
It also cautioned against populist measures like farm loan waivers and a fiscal stimulus to boost the sagging growth, but said there also exist mitigating factors like the possibility of a dip in commodity prices and food inflation.
"We will basically have to wait and watch on how inflation evolves," Acharya said, adding that even though household inflation expectations continue going down, they still remain "relatively high".
On growth, Acharya hinted it is not fair to extrapolate the 5.7 per cent GDP expansion in the June quarter into a trend which was a three-year low, while Patel pointed out to recent high frequency data like a surge in core sector which shows a reversal.
Acharya said reviving private investment can take up to 12-18 months, while Patel said as capacity utilisation levels move up, there can be a revival in the investment activities.
The RBI also announced a slew of regulatory policies and said that it will be releasing the final guidelines on peer-to -peer lending later this evening.
RBI continued to flay banks for keeping the lending rates high and flagged concerns over base rate and marginal cost of fund-based lending rate (MCLR), saying these have not been able to improve monetary transmission.
The MPC said structural reforms introduced in the recent period will likely be growth augmenting over the medium-to long-term by improving the business environment, enhancing transparency and increasing formalisation of the economy.
Markets were expecting the MPC to vote for a status quo on the rates at the policy announcement.
The government has been working on a plan to push up growth but has not announced any move yet. It cut the excise duty on fuels by Rs 2 in order to minimise the impact of increasing global fuel prices on domestic consumers, a move which heightens the risk of a fiscal slippage.