At its sixth bi-monthly monetary policy meeting on Tuesday, 2 February, the Reserve Bank of India (RBI) said the Indian economy "lost momentum" in the third quarter this fiscal due to "slackening agricultural and industrial growth", and retained the full-year GDP growth projection at 7.4 per cent with a "downward bias".
"In the first two months of Q3 of 2015-16, industrial activity slowed in relation to the preceding quarter. This mainly reflects weak investment demand with some deceleration of capital goods production. Stalled projects continue to remain high, and there is a decline in new investment intentions, perhaps on the back of low capacity utilisation," the bank said in a statement issued after the meeting.
The growth rate would be 7.6 per cent in FY2017, the bank said.
It cautioned that the implementation of the recommendations of the 7th Central Pay Commission "will impart upward momentum" to inflation for one to two years.
The pay panel had said the implementation would cost the Central government about Rs 1.02 lakh crore in FY2017.
An "accommodative" RBI left repo rate unchanged at 6.75 per cent, in addition to maintaining status quo on the cash reserve ratio and statutory liquidity ratio, saying it would wait for more information on inflation and the Union Budget.
"The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth," the bank said.
The apex bank's decision to maintain status quo was broadly in line with expectations of economists and analysts who had said high retail inflation would limit the bank's ability to cut policy rates.
Retail inflation for December 2015 was 5.61 per cent.
On inflation, the bank was optimistic that its target of 6 per cent for January 2016 "should be met" because of "benign" prices of food items and crude oil, and said inflation would remain at around 5 per cent by the end of FY2017, up from its earlier forecast of 4.8 per cent.
Stock markets drifted lower after the RBI announced its decision.
However, both the Sensex and the Nifty recovered later and were trading with minor losses around 1:10 pm. The Sensex was down 8 points at 24,816 while the Nifty was hovering around 7,544, a loss of 11 points.
Bank stocks were almost flat compared to their Monday closing, with the BSE Bankex at 17,311.95, down 0.26 per cent. The Nifty Bank also declined and was at 15,295.90, a loss of 0.12 per cent.
The Indian rupee opened at 67.85 against the dollar on Tuesday, after closing at 67.84 on Monday.