Springing a surprise at the markets, Reserve Bank of India (RBI) governor Raghuram Rajan has decided to leave the interest rates unchanged at 7.75 percent in the monetary policy announcement on Wednesday maintaining that it was a wait and watch scenario given the persistent inflation levels and uncertainty in the economy.

The RBI has maintained the repo rate at 7.75 percent and the cash reserve ratio (CRR) at 4 percent. The repo rate is the rate at which banks borrow from the central bank and this decides the interest rates applicable to consumers. The CRR refers to the proportion of total deposits which banks have to hold as reserves with the central bank and thus, is set accordingly to control money supply in the economy.

During his announcement of the monetary policy, Rajan said, “The policy decision is a close one. Current inflation is too high. However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty.”

While clarifying that the apex bank would “not react to every spike in inflation”, the governor has hinted at a possible intervention if inflationary pressures continued to soar. “If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold,” he said.

Rajan has further specified that the RBI shouldn’t be misunderstood to be on a “hold” position and that it is waiting for the new data to take further action. “Current data is marred by certain amount of noise and so we will wait for new data to take further action. Another month's reading of inflation will not put us way behind,” he told mediapersons after the monetary policy announcement. He further said that the apex bank would “calibrate policy rate consistent with the actual underlying inflation”.

Pointing that the overall global growth outlook continued to remain moderate due to uneven economic growth in different countries and the lingering risk of the Fed’s tapering program, the apex bank has advised that exercising caution is extremely crucial.

“We can't be complacent about the external environment. We are happy with the reduction in market volatility but are watchful of the Fed’s tapering program. Presently however, we are better positioned to handle the it,” he said.

In the previous two monetary policy announcements made in the last two months, Rajan had hiked the interest rates by 25 basis points each time, sending a clear signal to the north block that populist measures was not his way of dealing with things and that keeping the inflation in check was his top priority. However, this did not go down well with India Inc. and a few other critics who blamed Rajan for trying to tackle supply-side inflation with demand-side solutions which not only failed to control inflation but also affected investor sentiment in the country.

While the latest move, contrary to market expectations, hasn’t brought too much cheer to the corporate groups, it surely has come as a ray of hope for improved investment climate in the country.

Calling the move a “welcome breather”, FICCI president Naina Lal Kidwai said, “It is important to bring the focus back on growth which has taken a serious beating. This is clearly reflected in the negative industrial growth witnessed in the recent past. Not only that, a discernible slowdown has been witnessed in the services sector as well. At this juncture we certainly need to push all buttons to safeguard growth and revive investor sentiment.”

“High interest rates are a dampener and have been a major impediment to new investments and overall growth. We are happy that RBI has taken cognisance of the weak state of the industrial economy and hope that the next move will be in the direction of lowering of policy rates," Kidwai said, adding that the government needs to address the issue of increasing food prices by reviewing procurement, warehousing and logistics strategies.

In addition, CII director general Chandrajit Banerjee said, “While being fully cognizant of the imperatives of anchoring inflationary expectations, CII is of the view that in the coming months, owing to a good agricultural performance, the prices of food items would moderate. With the rupee having stabilized, the fuel prices would also not see any sudden increase. To some extent that obviates the need for further monetary tightening. Therefore, the RBI has demonstrated restraint and foresight to strike the right balance between inflation and growth.”

The news has also come as a respite for banks which have been struggling to keep the demand for loans high and also ensuring high recovery of loans.

“This comes as a well-reasoned and extremely judicious policy. While inflation figures remain high, they need to be looked at in the background of low growth. The RBI governor is right when he says that food inflation cannot be controlled through the monetary policy tightening,” said Dr Manoranjan Sharma, chief economist, Canara Bank.

On being asked if the bank is now likely to slash interest rates on loans, Sharma said that no immediate changes would be made in the rates. “We don’t visualize any change in the interest rates anytime soon. Fow now, we will wait and see,” he said.