The Reserve Bank of India (RBI) on Wednesday, in line with analysts’ expectations, left the key benchmark lending rate untouched in its fifth bi-monthly credit policy meet of 2018-19 on the back of a fall in crude oil prices.

The Monetary Policy Committee (MPC) of the central bank kept the repo rate unchanged at 6.5% for the second time in a row, with the policy stance maintained at "calibrated tightening".

In October, the RBI’s status quo rate decision came as a surprise to analysts who were expecting a 25 bps rate hike in light of a weakening rupee. However, this time around, a status quo was expected as shown by a Reuters poll; it predicted only one more rate hike in FY19, most likely in March.

However, the RBI further lowered its projection for the Consumer Price Index (CPI)-based inflation for the second half of the current financial year to 2.7-3.2%. In October, the central bank revised it down to 3.9-4.5% from the earlier 4.8%. Remember, the RBI’s medium-term headline inflation target is 4%.

Addressing the media after the announcement of the rate decision, RBI governor Urjit Patel said the volatility in crude oil prices is something that the MPC will keep a close eye on to take calls on credit policy going forward. “We need more data points to ascertain the durability of decline in inflation,” Patel said, adding that the volatility in crude oil prices is now higher than it was in October.

With more data coming in, he said, the RBI’s projections going forward will change and the MPC will take calls accordingly. “There is a possibility of space opening up for commensurate action by the MPC dependent on data,” Patel said, hinting that a rate hike on the cards.

Analysts had predicted a cut in inflation projection, given a fall of over 25% in crude oil prices since early October.

Many were also expecting a cut in projection of gross domestic product (GDP) growth from FY19. However, the GDP forecast for the full-year was retained at 7.4%, with the projection for the second half of the year (October-March) at 7.2-7.3%.

Remember, GDP growth for the second quarter of FY19 slowed to 7.1%, while India’s April-October fiscal deficit has already crossed the full-year target. Patel warned that a fiscal slippage at the centre or state-level is likely to “have a bearing on the inflation outlook, heighten market volatility", and dampen private investment.

Among other important announcements made by the RBI was a decision to link retail loans to external benchmarks, instead of the marginal cost of funds-based lending rate (MCLR). From April 2019 onwards, interest rates for all retail loans like home loans, car loans, automobile loans, and loans to MSMEs will be linked to repo rate, the yield on the government's 91-day or 182-day Treasury bill, or any other benchmark market interest rate given by Financial Benchmarks India.

The reason behind this move, the RBI said, was to ensure that any rate cuts were passed on to retail borrowers by the banks without any delay.

On addressing the liquidity crunch in the NBFC space, the RBI said that the pace of its open market operations (OMO) has been stepped up, with Rs 1 lakh crore injected into the system in the past three months.

RBI’s deputy governor Viral Acharya said that the central bank was watching the developments in the markets with respect to liquidity very closely and was ready to stand as a lender of last resort to NBFCs.

The RBI also said that an expert committee to come up with long-term solutions for the economic and financial sustainability of the MSME sector. The members of this committee will be finalised by the end of December and the report will be submitted by June 30 next year.

All eyes were on RBI governor Urjit Patel for a comment on the alleged tension between the RBI and the central government. However, when asked about the reported rift, which made headlines after deputy governor Viral Acharya’s emphatic speech asserting the need to protect RBI’s autonomy, Patel refused to comment.

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