RBI maintains wait and watch approach on rates

Sensex ends lower ahead of RBI's monetary policy decision

In addition, the country's inflation forecast for the second half of the current financial year rose between 4.3% and 4.7%.

The RBI today kept its repo rate - at which it lends to banks - at 6 per cent.

Going forward, the MPC believes that the inflation path will be influenced by several factors. Pointing out that inflation expectations of households surveyed by the RBI had already firmed up, it hinted that any increase in food and fuel prices could push up inflation further. It expanded at a faster pace in the July-September quarter, at 6.3%, recovering from a three-year low of 5.7% in the April-June quarter.

The MPC sounds a bit hawkish when it says that the evolving inflation trajectory needs to be carefully monitored due to rising input costs pointing towards high risk of pass-through to retail prices, implementation of farm loan waivers by select states, partial roll back of excise duty and Value-Added Tax for petroleum products and decrease in revenue due to lower GST rates resulting in fiscal slippage with related implication for inflation.

The central bank retained economic growth forecast at 6.7 per cent for the fiscal to March.

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"The RBI has taken cognisance of further improvement on growth prospects by government through structural reforms including recapitalisation of banks", she said. The capital infused has helped in raising the market by setting up new projects.

Both Sensex and Nifty tumbled over 180 points and 70 points respectively, right after the central bank's policy announcement. As the interest rate setting mechanism used by banks continues to evolve, it would benefit retail and corporate borrowers thereby boosting the economy as a whole. Benign interest rates are solutions to both these issues.

The Reserve Bank's two-day monetary policy review kicked off on Tuesday.

The benchmark 10-year bond yield ended at 7.03 percent, compared with around 7.07 percent right before the RBI decision came in.

The positive end in bond markets comes after a recent sell-off sent the 10-year bond yield up by more than 60 bps since the RBI last cut the repo rate by 25 bps in early August. They expect the market to consolidate with a negative bias in near term, especially ahead of Federal Reserve Policy meeting next week and Gujarat State elections.

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