In the hierarchy of importance, it became obvious that a reduction in the benchmark policy rate by Reserve Bank of India (RBI) was the least relevant. That RBI brought down its repo rate by 25 basis points didn’t so much as tickle the stock indices or bond markets.

What the Street had its eyes on was the rationale and here, the monetary policy committee (MPC) kept its cards as close as possible to its chest. It is hazier now than in June whether the central bank will find reasons to prune rates further. No wonder bond yields edged higher while stock indices ended in the red.

If one strips the policy resolution of post facto analysis, it has retained its hawkish shade. The MPC acknowledged that retail inflation excluding the volatile food and fuel components has reduced significantly and could potentially check inflationary impulses going forward. In a nutshell, RBI is finally comfortable with the core inflation in the economy. The policy also agreed that private investment is still comatose and the upside risks to inflation that it saw two months back have either reduced or haven’t materialized at all. All this is playing catch-up to market commentary.

RBI believes that from here on, retail inflation has only one direction: upwards. The statement cited signs of spikes in vegetable prices, wearing off of the base effect and the big impact from pay commission implementation by states as upsides to the inflation forecast. The pay hikes by states, once implemented, will jack up inflation by 100 bps if they mirror that of the central government in scale, according to RBI. Governor Urjit Patel fears that eventually, inflation will not just reach 4% but overshoot it in the fourth quarter of 2017-18. For an inflation-targeting central bank, this is reason enough to stay put. Further, the central bank cannot be soft when its own household inflationary expectations survey shows that Indians believe prices will rise faster from hereon.

Next RBI rate cut uncertain, liquidity management a bigger challenge

Another argument to hedge against a further rate cut is transmission of past rate cuts. Patel and his deputy Viral Acharya brought forth the stickiness in bank loan rates yet again saying that there still is scope for lending rate cuts. In fact, RBI will constitute an internal study group to relook at the marginal cost based lending rate (MCLR) formula as it feels the transmission has been unsatisfactory. However, it would be unfair to ignore the concerns of RBI on growth. The policy resolution states that there is an urgent need to stoke private investment. The central bank is readying banks for a pick-up in credit demand by speeding up the balance sheet clean-up process. What RBI is betting on is government sponsored schemes for housing that in Patel’s view has the potential to be a big multiplier for growth.

When asked whether the current stance is as accommodative as RBI can get, Patel’s answer gave away nothing. So coming back to the question of whether more rate cuts are in the offing, RBI is probably as unsure as it was in June, and it doesn’t want to tell.