The Reserve Bank of India (RBI) on Friday maintained the status quo in the policy repo rate for the fourth time running but reiterated its hawkish stand as it signalled tight liquidity conditions ahead and resolved to bring inflation closer to the mandated target of 4 per cent.

The hawkish tone suggested interest rates would stay at elevated levels for a longer period, with policy relief only if inflation falls closer to the target of 4 per cent on a durable basis.

As widely expected, the monetary policy committee (MPC) of the RBI kept the repo rate unchanged at 6.50 per cent after its three-day meeting. Borrowers of home loans have, thereby, been spared higher interest rates.

A moderation in retail inflation allowed the MPC to keep the rate unchanged. Inflation based on the consumer price index (CPI), or retail inflation, fell to 6.8 per cent in August after surging to 7.4 per cent in the previous month.
Inflation is forecast to fall further in September as food prices have remained benign, while the Centre has reduced the price of cooking gas.

Declining core inflation — which excludes the food and fuel components — was another factor behind the MPC's decision to hit the pause button even as the panel allowed the impact of the cumulative 250-basis-point hike announced earlier to fully play out on the economy.

RBI governor Shaktikanta Das asserted the fight against inflation is not over, and the central bank is steadfast in bringing it down to 4 per cent on a durable basis and not merely keeping it within the range of 2-6 per cent.

"I would like to emphatically reiterate our inflation target is 4 per cent and not 2-to-6 per cent. We aim to align inflation to the target on a durable basis while supporting growth,’’ he said in a televised address.

While falling core inflation is a silver lining, the overall inflation outlook is clouded by uncertainties in supply.

These range from fall in area under kharif cultivation in key crops such as pulses and oilseeds and low reservoir levels to volatile global food and energy prices.

There are also apprehensions that the recurring incidence of large and overlapping food price shocks could lead to stubborn inflation.

Responding to a query on whether a sub-4-per-cent reading in CPI would see the RBI changing its policy stance or cutting rates, Das said the focus is on aligning inflation outcomes with the target.

"If retail inflation goes below 4 per cent on a durable basis, we will shift our stance to accommodation. We are all trying to keep inflation at the target or around it. We reiterate the word we have used is align inflation to the 4 per cent target because if there is a sudden spike or if there is a sudden fall, we have to see how durable is that decline," Das said.

While the RBI did not surprise by holding on to the repo rate at 6.5 per cent, the markets were taken aback by its statement on liquidity management.

"We do not see headline inflation durably around the 4 per cent mark over, at least, the next 12 months. The RBI will remain hawkish until domestic growth sees visible stress. We maintain our call that the MPC will remain on a prolonged pause well into 2024-25,’’ a note from Kotak Institutional Equities said.

An unchanged repo rate means home loan rates will not rise which paves the way for a spike in property investments during the festival season.

"We are entering the festive quarter with a very strong momentum in housing sales, and unchanged interest rates will act as a major catalyst for growth in the residential market,” said Anuj Puri, chairman, Anarock Group.