Leaving Mint Road observers surprised by holding the rates on Thursday, governor Shaktikanta Das said RBI cannot keep cutting policy rates "mechanically every time", but hinted at resuming the easing cycle after budget and analysing impact of previous 135 bps rate cuts on economy.
Significantly, even as the MPC hit the pause button unanimously, it massively slashed the growth forecast by a full 110 bps to 5 percent, and also warned of a steep spike in retail inflation to 4.7-5.1 percent in the second half.
After cutting repo rate five consecutive times to the tune of 135 bps to a nine-year low between February and October, Monetary Policy Committee left the policy rates unchanged at 5.15 percent.
Every analyst was expecting Das to go for the sixth straight policy reduction by at least 25 bps and pause in the February review.
The decision to hit the pause button was unanimous by the six-member rate-setting committee, Das told reporters at the customary post-policy presser.
"You must cut when the impact would be maximum; the timing is also very important rather than going on mechanically cutting the rates on every occasion," Das said explaining the rationale behind the surprise pause.
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Das was quick to add that the MPC continues to be accommodative as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
Das said the MPC decided to pause and see the outcomes of the government steps in the past four-five months, such as massively slashing corporate tax rates, easing issues faced by the automobile sector, and setting up a last mile fund for real estate sector, and also the impact of the five rate cuts by the Reserve Bank since February.
"We should allow some more time for the combined impact of the measures taken by the government and the consistent monetary easing by the RBI so far, for their full impact to unfold and play out," Das said.
Given these the MPC decided that it is better take a temporary pause and wait for better clarity on all these fronts during the February meeting, he added.
On whether hitting the pause button was due to the fears on the governor missing the fiscal targets, Das said there is no worry on fiscal deficit front. Further action on the rate front will also depend on the budget.
"I am not saying we are worried about fiscal numbers (being breached), but we'd just like to have greater clarity with regard to the kind and the nature of the counter-cyclical fiscal or any other measures that government may announce in the budget. It will give us greater clarity," Das explained.
But in more bad news on the macro front, the RBI massively slashed the growth forecast for FY20 to 5 percent- down a full 110 bps from its October projection at 6.1 percent, which again was a 90 bps reduction from its August forecast of 7 percent.
The economy is expected to be in the range of 4.9-5.5 percent in the second half and 5.9-6.3 percent in the first half of FY21, he said.
But he was quick to add, "we have seen some green- shoots emerging but it is too premature and assume how sustainable they are," and that the BBI and government continue to work in a coordinated manner to achieve the larger objective of reviving growth.
In more bad news, the MPC projected a sharp spike in headline inflation numbers to 4.7 to 5.1 percent for the second half and 4-3-4.8 percent for the first half of FY21.
"Our calculation is that in the fourth quarter, food inflation is likely to remain very high and any moderation in the coming months depends on several factors," Das said.
The RBI expects core inflation to remain in the current zone--below 4 percent but warned that the steep hike in telecom tariffs may have adverse impact on core inflation.
After chiding banks all these months for not cutting their lending rates, Das said the monetary transmission process has been full and reasonably swift across various money market segments and the private corporate bond market.
As against the cumulative policy rate reduction to the tune of 135 bps between February and October, the weighted average lending rate on fresh loans sanctioned declined by 44 bps, while the same on outstanding loans rose just 2 bps during this period. He also expressed hope that the transmission rate may gather speed going forward as banks have linked lending rates to the repo rate.