Mumbai: Market benchmark Sensex fell 218 points to quote at 32,584.66 in late afternoon trade on Wednesday soon after the Reserve Bank kept the policy rate unchanged at 6 per cent but raised the inflation forecast. The primary reason behind no change in policy rates reflects the Reserve Bank of India's focus on inflation control. "Additionally, given the fact that the economy is seeing a cyclical recovery in growth, RBI would rather wait and watch on how these factors play out before moving rates in either direction", said Upasna Bhardwaj, vice-president and senior economist at Kotak Mahindra Bank.
The RBI said that the second quarter growth was lower than what was projected.
All but two of 54 analysts in a Reuters poll had predicted the repo rate would be left unchanged at the lowest since November 2010 for a second meeting in a row.
The central bank also said that the "recent rise in worldwide crude oil prices may sustain, especially on account of the OPEC's decision to maintain production cuts through next year". The central bank, however, has been cautious due to rising inflation that's now at a seven-month high of 3.58 per cent.
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The RBI said the MPC remains committed to keeping headline inflation close to 4 percent on a durable basis. The yield on the 10-year sovereign bond was up one basis point to 7.07 percent and the rupee traded 0.1 percent lower at 64.4175 a dollar. The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
Reverse repo rate is the rate of interest offered by the RBI when banks deposit their surplus funds with it for short periods.
"Against this backdrop, we expect the RBI to refrain from further rate cuts this week and for rest of FY18", said Radhika Rao, India economist at DBS Bank. It was 6.3 per cent, a marginal increase from last quarters 5.7 per cent.